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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, 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)
(845) 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 September 14, 2000: 2,633,524 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 July 31, 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 test. 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 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 nine-month period ended
July 31, 2000 versus the nine-month period ended July 31, 1999,
and for the third quarter ended July 31, 2000 versus the third
quarter ended July 31, 1999.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS FOR THE THIRD FISCAL QUARTER
AND FOR THE NINE-MONTH PERIOD ENDED JULY 31, 2000
Nine Months Three Months
Ended July 31, Ended July 31,
-------------- --------------
% %
- -
2000 1999 Change 2000 1999 Change
---- ---- ------ ---- ---- ------
(in thousands (in thousands
of dollars) of dollars)
<S> <C> <C> <C> <C> <C> <C>
Assessment Products Revenues $3,293.7 $3,370.6 -2.3 $1,430.9 $1,292.8 +10.7
Instructional Revenues 1,707.1 1,711.0 0.0 1,035.6 1,137.5 -9.0
Educational Delivery Revenues 3,544.3 3,477.8 +1.9 1,159.0 929.3 +24.7
-------------------------------------------------------------
Total Revenues $8,545.1 $8,559.4 0.0 $3,625.5 $3,359.6 +7.9
</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,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
(in percentages) (in percentages)
Revenues 100% 100% 100% 100%
---- ---- ---- ----
Gross Profit Margin 60 62 65 62
Operating Expense:
Selling Expense 23 21 23 20
General & Administrative 45 39 35 34
Income (Loss) from Operations (8) 3 7 9
Other (Expense) (7) (5) (5) (5)
Pre-Tax Income (Loss) (14) (2) 2 5
Net Income (Loss) (9) (1) 1 3
FOR THE THREE MONTHS ENDED JULY 31, 2000 VERSUS JULY 31, 1999
REVENUES. For the three-month period ended July 31,
--------
2000 (the "Current Quarter"), revenues were $3,625,527,
representing an 8% increase, or $265,974, over $3,359,553 for the
three-month period ended July 31, 1999 (the "Comparable
Quarter").
Revenues for assessment products and services increased
11%, or $138,077, to $1,430,855 in the Current Quarter from
$1,292,778 in the Comparable Quarter. Of this increase, the
Company's proprietary test division's revenues remained fairly
constant while the custom test division, BETA, increased its
revenues by 22% in the same period. During the Current Quarter,
the Company secured a five-year $1.2 million contract for the
continuance of the New York State Regents Competency Test.
Instructional revenues decreased 9% in the Current
Quarter from the Comparable Quarter (or $1,035,659 in the Current
Quarter versus $1,137,462 in the Comparable Quarter). This
decrease can be attributed to the timing of booking and shipping
orders for instructional products during the Current Quarter. As a
result, approximately $300,000 of revenue associated with these
orders will be recognized upon shipping the related instructional
products in the Company's fourth quarter.
The educational delivery division revenues increased 25% in the
Current Quarter versus the Comparable Quarter, (or $1,159,013 in
the Current Quarter versus $929,313 in the Comparable Quarter). This
increase can be primarily attributable to greater student census
during the quarter.
COST OF GOODS SOLD. Cost of goods sold in the Current
------------------
Quarter increased minimally (by 2%), or $21,465, from $1,260,704
in the Comparable Quarter to $1,282,169 in the Current Quarter.
Cost of goods sold as a percentage of revenues decreased from 38%
to 35% due to a change in product mix. During the Current
Quarter, a greater percentage of the Company's revenues was
generated through the educational delivery division, typically
associated with lower direct costs.
GROSS PROFIT. In the Current Quarter, gross profit
------------
increased by 12%, or $244,509, from $2,098,849 in the Comparable
Quarter to $2,343,358 in the Current Quarter. The increase in
gross profit is attributable to an increase in revenues during
the Quarter. The gross profit margin percentage increased in the
Current Quarter to approximately 65% from 62% in the Comparable
Quarter as a result of a greater percentage of the Company's
revenues generated through the educational delivery
division, typically associated with lower direct costs.
SELLING EXPENSES. Selling expenses for the Current
----------------
Quarter increased $169,903, or from $658,555 in the Comparable
Quarter to $828,458 in the Current Quarter. Selling expenses as
a percentage of revenue were 23% in the Current Quarter versus
20% for the Comparable Quarter. This percentage increase can be
primarily attributed to the increased percentage of educational
delivery revenues generated during the Current Quarter which are
typically associated with higher selling expenses and overall
increased organizational marketing efforts.
GENERAL AND ADMINISTRATIVE EXPENSES. The Company's
-----------------------------------
general and administrative expenses increased 11%, or $128,865,
from $1,132,421 in the Comparable Quarter to $1,261,286 in the
Current Quarter. General and administrative expenses were 35% of
revenues in the Current Quarter versus 34% in the Comparable
Quarter. This dollar and percentage increase was primarily
attributable to management's decision to continue to build the
Company's infrastructure at both the corporate and operating
divisional levels and to establish adequate reserves.
INCOME (LOSS) FROM OPERATIONS. Income from operations
-----------------------------
for the Current Quarter was $253,614 versus $307,873 in the
Comparable Quarter. The $54,259 decline was primarily due to the
increase in general and administrative expenses.
EBITDA. Earnings before interest, taxes, depreciation,
------
and amortization decreased $12,963 to $529,538 in the Current
Quarter from $542,501 in the Comparable Quarter. As a percentage
of sales, EBITDA decreased marginally to 15% in the Current
Quarter versus 16% in the Comparable Quarter. The overall
decrease in EBITDA dollars can be attributable to the increase in
general and administrative expenses.
OTHER INCOME (EXPENSE). Net other expense increased to
----------------------
($181,749) in the Current Quarter from ($156,490) in the
Comparable Quarter. This increase was primarily attributable to
a decline in income earned on temporary investments and
marketable securities as well as a decline in other income.
INCOME (LOSS) BEFORE INCOME TAXES. The Company
---------------------------------
generated income (loss) before income taxes of $71,865 in the
Current Quarter versus $151,383 in the Comparable Quarter. The
$79,518 decline in income (loss) before income taxes is primarily
attributable to the increase in general and administrative
expenses.
NET INCOME (LOSS) AND BASIC INCOME (LOSS) PER SHARE. Net
---------------------------------------------
income (loss) after taxes was $45,262 for the Current Quarter
versus $100,731 for the Comparable Quarter. Basic income (loss) per
share was ($.02) for the Current Quarter based on weighted average
shares outstanding of 2,559,458, while the Comparable Quarter basic
income (loss) per share was ($.05) based upon 2,141,801 weighted
average shares outstanding.
FOR THE NINE MONTHS ENDED JULY 31, 2000 VERSUS JULY 31, 1999
REVENUES. For the nine-month period ended July 31,
--------
2000 (the "Current Period") revenues were $8,545,115,
representing a nominal decrease, or $14,370 versus $8,559,485 for
the nine-month period ended July 31, 1999 (the "Comparable
Period"). The overall decrease was due primarily to a decline in
our proprietary testing division revenues.
Revenues for assessment products and services decreased
2%, or $76,896, from $3,370,643 in the Comparable Period to
$3,293,747 during the Current Period. Revenues from the
Company's proprietary test division, featuring DRP products, fell
19% 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. Further, a
delay in the introduction of a new series of DRP test forms
impacted revenues for the Current Period. This decrease
was offset by growth in the Company's custom test design
division, BETA, which posted a revenue increase of 33%.
Instructional revenues remained fairly consistent,
decreasing minimally from $1,710,994 in the Comparable Period to
$1,707,111 in the Current Period. During the Current Period,
the Company received approximately $300,000 in orders which were
not shipped until the early part of August. As a result, approximately
$300,000 of revenue associated with these orders will be recognized
upon shipping the related instruction products in the Company's
fourth fiscal quarter.
Revenues from the Company's educational delivery
division increased 2% or $66,409, to $3,544,257 from $3,477,848
in the Comparable Period. This increase can be primarily
attributed to greater student census during the Current Period.
COST OF GOODS SOLD. Cost of goods sold in the Current
------------------
Period increased by 5%, or $156,756, from $3,232,682 in the
Comparable Period to $3,389,438 in the Current Period. Cost of
goods sold as a percentage of revenues increased to 40% in the
Current Period from 38% in the Comparable Period. This increase
was primarily the result of the increased costs required to deliver
assessment products and services, more specifically, the
Company's custom test design division's services which are
associated with higher direct costs.
GROSS PROFIT. For the Current Period, gross profit
------------
decreased by 3%, or $171,126, from $5,326,803 in the Comparable
Period, to $5,155,677. The gross profit margin decreased in the
Current Period to 60% versus 62% in the Comparable Period. These
decreases are primarily attributable to an increase in direct
costs associated with revenue gains in the Company's custom test
design division.
SELLING EXPENSE. Selling expenses for the Current
---------------
Period increased by 11%, or $191,523, from $1,764,270 in the
Comparable Period to $1,955,793 in the Current Period. As a
percentage of revenues, selling expenses were 23% for the Current
Period versus 21% for the Comparable Period. These increases can
be primarily attributed to overall increased organizational
marketing efforts.
GENERAL AND ADMINISTRATIVE EXPENSES. The Company's
-----------------------------------
general and administrative expenses increased 16%, or $533,534,
from $3,316,276 in the Comparable Period to $3,849,810 in the
Current Period. General and administrative expenses as a
percentage of revenues are now 45% in the Current Period versus
39% in the Comparable Period. These dollar and percentage
increases are primarily due to management's decision to continue
to build the infrastructure of the organization coupled with the
further establishment of adequate reserves and the write-off of
due diligence expenses associated with failed acquisitions.
INCOME (LOSS) FROM OPERATIONS. Income (loss) from
-----------------------------
operations for the Current Period was ($649,926) versus income
(loss) from operations of $246,257 in the Comparable Period.
This loss was principally due to the increase in selling and
general and administrative expenses.
EBITDA. Earnings (loss) before interest, taxes,
------
depreciation, and amortization decreased $794,114 to $148,105 in
the Current Period from $942,219 in the Comparable Period. As a
percentage of sales, EBITDA decreased to 2% in the Current Period
versus 11% in the Comparable Period. This percentage decrease is
essentially attributable to the increase in general and
administrative expenses coupled with a lower gross profit margin
resulting from an increase in revenues from the Company's custom
test design division.
OTHER INCOME (EXPENSE). Net other income (expense)
----------------------
increased to ($556,490) in the Current Period versus ($434,593)
in the Comparable Period. The increase is primarily attributable
to a decline in income earned on temporary investments and
marketable securities as well as a decline in other income.
INCOME (LOSS) BEFORE INCOME TAXES. The Company had a
---------------------------------
loss before taxes of ($1,206,416) for the Current Period versus a
loss before taxes of ($188,336) in the Comparable Period which
was primarily due to increased overhead and costs of goods sold.
NET INCOME (LOSS) AND BASIC INCOME (LOSS) PER SHARE. Net
---------------------------------------------
loss after taxes was ($784,117) for the Current Period versus a
loss of ($108,973) for the Comparable Period. For the Current
Period basic income (loss) per share was ($.33) based on weighted
average shares outstanding of 2,397,292. The Comparable Period
basic loss per share was ($.05) based upon 2,141,801 weighted average
shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. Working capital at the end of the
---------------
Current Period was $1,797,546, down from $3,079,573 at the
beginning of the current fiscal year. The $1,282,027 decline is
primarily due an increase in borrowings on the Company's bank
lines 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
1.4 to 1.0 at the end of the Current Period. Approximately 2% 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
($1,029,098) versus a negative cash flow from operations of
($894,074) in the Comparable Period. The primary factor
contributing to this negative flow was the net loss of ($784,117)
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 ($459,427) versus a net cash outflow of
($2,335,120) in the Comparable Period. The net cash outflow is
primarily the result of investments made in test development
($522,292) 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 $467,462 versus a net cash outflow of ($787,448) in
the Comparable Period. This inflow was essentially attributable
to additional borrowings made on the Company's bank lines of
credit of approximately $578,000 during the Current Period.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In January 2000, a former employee of Mildred Elley commenced
an action against the Company, MESI and an executive officer of MESI
in the Supreme Court of the State of New York in the County of
Albany. The complaint alleges claims of wrongful termination of
employment and seeks damages as compensation. The Company
believes that the allegations are without merit and is vigorously
defending the action. The Company maintains directors and
officers liability insurance which, subject to a policy
deductible, insures the defendant officer, but not the Company,
against such claims.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On August 31, 2000, the Company received a letter from
the former owner of Mildred Elley School, Inc., alleging certain
defaults in the payment of amounts due under the asset purchase
agreement between the Company and Mildred Elley School, Inc. and
the accompanying promissory notes of MESI Acquisition Corp. (TASA's
wholly-owned subsidiary) ("MESI"). Such demand letter also alleges
additional defaults by MESI in the employment agreement between MESI
and Faith Takes, the former owner of the Mildred Elley School who is
currently MESI's president and chief executive officer. The amounts
demanded by Ms. Takes aggregate $985,270 plus interest, attorneys'
fees and late fees. The Company believes that it has meritorious
defenses and counterclaims to such allegations and is pursuing
resolution of these issues.
The foregoing alleged defaults trigger a potential
cross default under the Company's outstanding 8% Subordinated
Debentures, in the outstanding principal amount of $3,530,141 (as
of July 31, 2000) currently held by Cahill Warnock Strategic
Partners Fund, L.P. and Strategic Associates, L.P. The Company
has not received a notice of default from the holders of such
Debentures.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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, 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
July 31, October 31,
2 0 0 0 1 9 9 9
------- -------
(Unaudited)
ASSETS
------
Current assets:
Cash and temporary investments $ 119,830 $ 1,140,893
Marketable securities -- 175,000
Accounts receivable, net of allowance for
doubtful accounts of $67,500 and $0,
respectively 1,843,562 1,312,148
Tuition receivable, net of allowance for
doubtful accounts of $364,544 and
$213,817, respectively 2,953,200 2,176,960
Inventories 801,851 472,341
Prepaid expenses and other current assets 260,889 202,114
----------- -----------
Total current assets 5,979,332 5,479,456
Property, plant and equipment - net of
accumulated depreciation of $1,577,592 and
$1,387,170, respectively 1,994,294 2,072,581
Other assets:
Non-current tuition receivable, net of
allowance for doubtful accounts of
$121,514 and $71,273, respectively 343,109 309,274
Test passage bank and test development, net of
accumulated amortization of $2,113,282 and
$1,838,694, respectively 2,886,857 2,823,931
Goodwill, net of accumulated amortization of
$408,864 and $280,527, respectively 3,862,168 3,953,238
Deferred income taxes 880,127 415,400
Other assets 1,264,788 1,330,537
----------- -----------
Total assets $17,210,675 $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
July 31, October 31,
2 0 0 0 1 9 9 9
------- -------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Lines of credit $ 977,748 $ 400,000
Current maturities of long-term debt 658,737 503,799
Current maturities of capitalized lease
obligations 15,619 14,002
Accounts payable and accrued expenses 2,134,169 1,482,082
Deferred revenue 395,513 --
----------- -----------
Total current liabilities 4,181,786 2,399,883
Long-term debt:
Subordinated debt 3,530,141 4,000,000
Long-term debt, net of current portion 2,852,217 3,103,470
Long-term capitalized lease obligations,
net of current portion 15,619 31,204
----------- -----------
Total liabilities 10,579,763 9,534,557
----------- -----------
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 (382,168) (470,460)
Unearned compensatory stock (12,947) (19,965)
Retained earnings 1,503,475 2,287,592
----------- -----------
Total stockholders' equity 6,630,912 6,849,860
----------- -----------
Total liabilities & stockholders' equity $17,210,675 $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
Nine Months Ended Three Months Ended
July 31, July 31,
(Unaudited) (Unaudited)
2 0 0 0 1 9 9 9 2 0 0 0 1 9 9 9
------- ------- ------- -------
<S> <C> <C> <C> <C>
Assessment revenues $3,293,747 $3,370,643 $1,430,855 $1,292,778
Educational delivery revenues 3,544,257 3,477,848 1,159,013 929,313
Instructional revenues 1,707,111 1,710,994 1,035,659 1,137,462
---------- ---------- ---------- ----------
Total net revenue 8,545,115 8,559,485 3,625,527 3,359,553
Cost of goods sold 3,389,438 3,232,682 1,282,169 1,260,704
---------- ---------- ---------- ----------
Gross profit 5,155,677 5,326,803 2,343,358 2,098,849
---------- ---------- ---------- ----------
Operating expenses:
Selling expenses 1,955,793 1,764,270 828,458 658,555
General and administrative expenses 3,849,810 3,316,276 1,261,286 1,132,421
---------- ---------- ---------- ----------
Total operating expenses 5,805,603 5,080,546 2,089,744 1,790,976
---------- ---------- ---------- ----------
Income (loss) from operations (649,926) 246,257 253,614 307,873
Other income (expense):
Interest expense (605,036) (615,181) (197,335) (200,118)
Investment income 48,546 106,672 15,586 30,775
Other income -- 88,053 -- 12,853
Loss on sale of assets -- (14,137) -- --
---------- ---------- ---------- ----------
Income (loss) before income taxes (1,206,416) (188,336) 71,865 151,383
Income taxes (benefit) (422,299) (79,363) 26,603 50,652
---------- ---------- ---------- ----------
Net income (loss) (784,117) (108,973) 45,262 100,731
Other comprehensive loss, net of tax:
Unrealized holding loss on securities
arising during the period -- (3,721) -- (1,414)
---------- ---------- ---------- ----------
Total comprehensive income (loss) $ (784,117) $ (112,694) $ 45,262 $ 99,317
========== ========== ========== ==========
Weighted average shares outstanding
Basic 2,397,292 2,141,801 2,559,458 2,141,801
Diluted 2,397,292 2,141,801 2,650,716 2,402,730
Earnings Earnings (loss) per share
Basic $ (.33) $ (.05) $ .02 $ .05
Diluted $ (.33) $ (.05) $ .02 $ .04
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F - 3
<PAGE> F-4
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Page 1 of 2
Nine Months Ended
July 31,
(Unaudited)
2 0 0 0 1 9 9 9
------- -------
OPERATING ACTIVITIES
Net loss $ (784,117) $ (108,973)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization 798,031 695,962
Deferred income taxes (464,727) (49,155)
Deferred interest 88,292 88,292
Financial advisory services 7,018 14,883
Bad debt expense 268,468 139,467
Loss on sale of assets -- 14,137
Changes in operating assets and liabilities:
Accounts receivable (598,914) (395,642)
Inventories (329,510) 39,794
Other assets (50,199) (115,910)
Tuition receivable (1,011,043) (725,514)
Deferred revenue 395,513 46,731
Accounts payable and accrued expenses 652,090 (538,146)
----------- ----------
NET CASH FLOWS FROM OPERATING ACTIVITIES (1,029,098) (894,074)
----------- ----------
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (112,135) (303,380)
Test passage bank and test development (404,419) (333,340)
Prepublication costs (117,873) --
Proceeds from the sale of marketable securities 175,000 270,000
Proceeds from the sale of assets -- 13,200
Acquisition of subsidiaries -- (1,964,792)
Acquisition of test -- (16,808)
----------- ----------
NET CASH FLOWS FROM INVESTING ACTIVITIES (459,427) (2,335,120)
----------- ----------
FINANCING ACTIVITIES
Net repayment of long-term debt (110,286) (428,891)
Net borrowings on lines of credit 577,748 --
Net repayment of loan payable -- (337,642)
Payment of mortgage costs -- (35,265)
Stock subscriptions received -- 14,350
----------- ----------
NET CASH FLOWS FROM FINANCING ACTIVITIES 467,462 (787,448)
----------- ----------
[FN]
See notes to consolidated financial statements.
</FN>
F - 4
<PAGE> F-5
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Page 2 of 2
Nine Months Ended
July 31,
(Unaudited)
2 0 0 0 1 9 9 9
------- -------
NET CHANGE IN CASH AND TEMPORARY
INVESTMENTS $(1,021,063) $(4,016,642)
CASH AND TEMPORARY INVESTMENTS
AT BEGINNING OF PERIOD 1,140,893 4,980,230
----------- ----------
CASH AND TEMPORARY INVESTMENTS
AT END OF PERIOD $ 119,830 $ 963,588
=========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 615,662 $ 537,538
=========== ===========
Income taxes paid $ 79,998 $ 32,351
=========== ===========
Stock issued in repayment of subordinated note $ 469,859 $ --
=========== ===========
SUMMARY OF ACQUIRED SUBSIDIARY:
Assets acquired consisting primarily
of Goodwill $ -- $ 6,950,721
Liabilities assumed -- 3,562,828
----------- -----------
NET PURCHASE PRICE $ -- $ 3,387,893
=========== ===========
[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") contain all adjustments necessary to present fairly
the Company's consolidated financial position as of July 31, 2000
and October 31, 1999 and the consolidated results of operations
and comprehensive income for the nine and three months ended July
31, 2000 and 1999 and consolidated cash flows for the nine months
ended July 31, 2000 and 1999.
The consolidated results of operations for the nine and three
months ended July 31, 2000 and 1999 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, 1999.
Name Change for Subsidiary
--------------------------
In June 2000, MESI Acquisition Corp., a wholly owned subsidiary of
the Company, changed its name to Mildred Elley School, Inc.
("Elley").
NOTE 2 - 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.
NOTE 3 - RELATED PARTY TRANSACTIONS
-----------------------------------
In July 2000, two officers of the Company advanced an aggregate of
$80,000 to the Company. The loans bear interest at the prime rate
and are payable on demand.
F - 6
<PAGE> F-7
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - SEGMENT INFORMATION
-----------------------------
<TABLE>
<CAPTION>
Assessment Delivery Instructional Total
---------- -------- ------------- -----
<S> <C> <C> <C> <C>
Nine Months Ended July 31, 2000:
Revenues $3,293,747 $3,544,257 $1,707,111 $ 8,545,115
Loss before income taxes (696,740) (395,836) (113,840) (1,206,416)
Total segment assets 7,383,282 6,949,287 2,758,276 17,090,845
Nine Months Ended July 31, 1999:
Revenues $3,370,643 $3,477,848 $1,710,994 $ 8,559,485
(Loss) income before income tax (663,292) 360,090 114,866 (188,336)
Total segment assets 7,158,858 6,831,448 2,669,656 16,659,962
</TABLE>
Included in the assessment segment reporting are corporate
overhead expenses of approximately $324,000 and $600,000 for the
nine months ended July 31, 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 nine month periods ended July 31, 2000
and 1999, is not considered material to the financial statements.
NOTE 5 - SUBSEQUENT EVENTS
------------------------
State Education Department Audit
--------------------------------
Elley is currently undergoing an audit conducted by the New York
State Education Department ("SED") relating to its involvement in
the New York State Tuition Assistance Program ("TAP"). In August
2000, Elley was notified that the SED had reached a preliminary
determination of a maximum liability totaling approximately $350,000
based on its initial findings. The Company has the right to respond
to this determination before it is finalized. In addition, the Company
believes it has the right of indemnification, for a portion of this
proposed liability, against the initial purchase price of the assets
of the former Mildred Elley School, Inc. ("Former Elley"), now
dissolved, as set forth in the terms of the Asset Purchase Agreement
entered into between the Company, Elley, and Former Elley.
Default on Notes Payable
------------------------
In August 2000, the Company received a letter from Faith Takes, a
former shareholder of Former Elley and, currently, the President and
Chief Executive Officer of Elley, alleging certain defaults in the
payment of amounts due under the Asset Purchase Agreement between
the Company, Elley, and Former Elley and the accompanying promissory
notes of Elley. Such demand letter also alleges additional defaults
by Elley in the employment agreement between Elley and Faith Takes.
The amounts demanded by Ms. Takes aggregate approximately $985,000
plus interest, attorneys' fees and late fees. The Company believes
that it has defenses and counterclaims to such allegations and is
currently pursuing resolution of these issues.
The foregoing alleged defaults trigger a potential cross default
under the Company's outstanding 8% Subordinated Debentures, in
the outstanding principal amount of $3,530,141 (as of July 31, 2000)
currently held by Cahill Warnock Strategic Partners Fund, L.P.
and Strategic Associates, L.P. The Company has not received a
notice of default from the holders of such Debentures.
F - 7
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: September 19, 2000
