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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 January 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)
(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 March 14, 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 January 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 twenty years, TASA has served the rapidly
expanding education 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 that 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 first quarter ended January
31, 2000 versus the first quarter ended January 31, 1999.
RESULTS OF OPERATIONS FOR THE FIRST FISCAL QUARTER
2000 1999 % Change
---- ---- --------
(in thousands of dollars)
Assessment Products Revenues 716.4 1,043.6 (31.3)
Instructional Revenues 261.8 201.9 29.7
Educational Delivery Revenues 587.1 1,110.6 (47.1)
Total Revenues 1,565.3 2,356.1 (33.6)
The following are selected ratios as a percentage of
revenues on the Company's financial statements:
January 31, January 31,
2000 1999
Revenues 100% 100%
--- ---
Gross Profit Margin 45 59
Operating Expense:
Selling Expense 35 23
General & Administrative 73 44
(Loss) from Operations (64) (8)
Other (Expense) (11) (6)
Pre-Tax Loss (75) (14)
Net (Loss) (48) (9)
REVENUES. For the three-month period ended January 31,
--------
2000 (the "Current Quarter"), revenues were $1,565,367,
representing a 34% decrease, or ($790,760), from $2,356,127 for
the three-month period ended January 31, 1999 (the "Comparable
Quarter"). The overall decrease can be attributed to the
Company's modification of its revenue recognition policy for the
educational delivery division as well as a decrease in the
revenues of the Company's assessment division during the period.
Revenues for assessment products and services decreased
31%, or ($327,197), from $1,043,635 in the Comparable Quarter to
$716,438 during the Current Quarter. Revenues from the Company's
proprietary test division, featuring DRP products, decreased 44%
primarily as a result of timing in the recognition of revenue
associated with its New York State contract and the declining
volume of sales in New York State. This decrease was due to the
State's movement from the PEP/DRP reading test previously
administered in the third and sixth grades to an alternative test
now being administered in the fourth and eighth grades. Revenues
from the Company's custom test design division, BETA, saw a
moderate 13% increase during the Current Quarter and the division
is continuing to grow in accordance with management's strategic
plan.
Instructional revenues increased 30% in the Current
Quarter from the Comparable Quarter (or $261,822 in the Current
Quarter versus $201,901 in the Comparable Quarter). This increase
is the result of marketing efforts achieved through new
independent sales and distribution organizations with whom the
Company entered into contracts during the last fiscal year.
These organizations now represent and market the Company's
instructional products in approximately 50% of the United States.
Management believes that this approach to marketing the products
of the instructional division will result in increased revenues
from this division.
The educational delivery division contributed $587,107
to the Company's Current Quarter revenues, which amount
represented a 47% decrease (or $523,484) from the Comparable
Quarter revenues for this division of $1,110,591. This decrease
is primarily the result of the Company's recent modification of
its revenue recognition policy as it relates to the educational
delivery revenues. Revenues for the educational delivery
division are now being recognized at the point in time in which
the Company has no exposure to future tuition refunds associated
with the related academic semester, rather than ratably over the
fiscal year. The net effect of this modification is that revenue
is not recognized until a student completes seven and one-half
weeks of schooling within a particular semester. As a result,
the Company has additional deferred revenue of approximately
$162,000 at January 31, 2000 above deferred revenue at January
31, 1999, but which will be recognized during the Company's
second quarter of the current fiscal year. The Company believes
that it is now reflecting more accurately the revenue of the
educational delivery division associated with its peak and non-peak
sales periods.
COST OF GOODS SOLD. Cost of goods sold decreased to
------------------
$866,741 in the Current Quarter, or 10%, versus $966,576 in the
Comparable Quarter. Cost of goods sold as a percentage of
revenues increased from 41% in the Comparable Quarter to 55% in
the Current Quarter. This increase is largely attributable to
the decrease in revenues recognized associated with the Company's
educational delivery division coupled with such division's costs
being semi-fixed, and to an increase in revenues in BETA which
are typically associated with higher direct costs.
GROSS PROFIT. In the Current Quarter, gross profit
------------
decreased by 50%, or ($690,925), from $1,389,551 in the
Comparable Quarter to $698,626 in the Current Quarter. The
decrease in gross profit is primarily attributable to the
decrease in revenues recognized from the educational delivery
division. The gross profit margin percentage decreased from 59%
in the Comparable Quarter to 45% in the Current Quarter as a
result of the decrease in revenues recognized associated with the
Company's educational delivery division coupled with this
division's costs remaining semi-fixed, and increased costs to
deliver assessment products and services during the Current
Quarter.
SELLING EXPENSES. Selling expenses for the Current
----------------
Quarter remained fairly flat increasing minimally from $545,359
in the Comparable Quarter to $552,766 in the Current Quarter.
However, selling expenses as a percentage of sales increased to
35% in the Current Quarter from 23% in the Comparable Quarter.
This increase is primarily attributable to the decrease in
revenues from the assessment and educational delivery divisions
coupled with selling expenses remaining fairly constant.
GENERAL AND ADMINISTRATIVE EXPENSES. The Company's
-----------------------------------
general and administrative expenses increased 11%, or $110,705,
from $1,033,858 in the Comparable Quarter to $1,144,563 in the
Current Quarter. General and administrative expenses as a
percentage of sales also increased from 44% in the Comparable
Quarter to 73% in the Current Quarter. These increases can be
attributed to revenue decreases in both the assessment and
educational delivery divisions coupled with additional costs
incurred in building the Company's infrastructure. Management
believes that the Company's general and administrative expenses
as a percentage of sales will continue to decrease throughout the
balance of the current fiscal year as the Company approaches its
peak sales periods.
(LOSS) FROM OPERATIONS. Loss from operations increased
----------------------
($809,037) from ($189,666) in the Comparable Quarter to
($998,703) in the Current Quarter. This increase resulted
primarily from a decrease in revenue from both the Company's
educational delivery and assessment divisions.
EBITDA. Earnings before interest, taxes, depreciation,
------
and amortization decreased ($823,214) to ($760,796) in the
Current Quarter from $62,418 in the Comparable Quarter. As a
percentage of sales, EBITDA decreased to (49%) in the Current
Quarter versus 3% in the Comparable Quarter. This percentage
decrease is essentially attributable to the decrease in revenues
from both the Company's educational delivery and assessment
divisions.
OTHER (EXPENSE). Other (expense) increased ($47,348)
---------------
to ($180,080) in the Current Quarter from ($132,732) 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 ($1,178,783) for the Current Quarter
versus a loss of ($322,398) for the Comparable Quarter. This
increase in (loss) before income taxes is largely attributable to
the decrease in revenues from both the Company's educational
delivery and assessment divisions.
NET (LOSS) AND (LOSS) PER SHARE. Net (loss) after
-------------------------------
taxes was ($755,873) for the Current Quarter versus a net (loss)
of ($200,357) for the Comparable Quarter. (Loss) per share was
($.35) based on weighted average shares outstanding of 2,141,801.
After giving effect to the one-for-four reverse stock split
effected by the Company on March 4, 1999, the Comparable Quarter
(loss) per share would have been ($.09) based on weighted average
shares outstanding of 2,141,801.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. Working capital at the end of the
---------------
Current Quarter was $1,743,602 down from $3,079,573 at the
beginning of the current fiscal year. The $1,335,971 decline is
primarily due to the increase in deferred revenue resulting from
the Company's modification of its revenue recognition policy for
the educational delivery division and a significantly lower
EBITDA, further resulting in a reduction of cash and temporary
investments during the Current Quarter. The ratio of current
assets to current liabilities was 1.6 to 1.0 at the end of the
Current Quarter. Approximately 8% of the Company's current
assets at the end of the Current Quarter consisted of cash,
short-term investments and marketable securities, while accounts
and tuition receivables, inventories and prepaid expenses
comprised the balance.
CASH FLOW FROM OPERATING ACTIVITIES. For the Current
-----------------------------------
Quarter, the Company had a negative cash flow from operations of
($471,309) versus a negative cash flow from operations of
($1,100,550) in the Comparable Quarter. The primary factor
contributing to this negative flow was the net loss of ($755,873)
incurred during the Current Quarter.
CASH FLOW FROM INVESTING ACTIVITIES. For the Current
-----------------------------------
Quarter, the Company had a net cash outflow from investing
activities of ($306,252) versus a net cash outflow of
($2,120,224) in the Comparable Quarter. This net outflow is
primarily the result of investments made in test development
($132,296) and new instructional publications ($75,429) during
the Current Quarter.
CASH FLOW FROM FINANCING ACTIVITIES. For the Current
-----------------------------------
Quarter, the Company had a net cash outflow from financing
activities of ($126,269) versus ($286,540) in the Comparable
Quarter. This outflow was essentially attributable to the
repayment of long-term debt of ($122,908).
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In January 2000, a former employee of Mildred Elley
commenced an action against the Company, MESI Acquisition Corp.,
an indirect wholly-owned subsidiary of 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
(a) None.
(b) None.
(c) On February 8, 2000, Cahill, Warnock Strategic
Partners Fund, L.P. (the "Fund") and Strategic Associates, L.P.
("Strategic", together with the Fund, the "Investors") exercised
warrants to purchase an aggregate of 417,652 shares of Common
Stock of the Company. The Warrants were exercisable at a price
of $1.125 per share; accordingly, the Company received an
aggregate of $469,858.50 upon such exercises. Such shares are
not registered under the Securities Act of 1933, as amended
("Securities Act"), and the Company relied on the exemption from
registration provided by Section 4(2) of the Securities Act.
However, pursuant to a Registration Rights Agreement among the
Company and the Investors, the Company has agreed to register
with the Securities and Exchange Commission such shares and the
shares remaining the subject of the unexercised warrants with the
Securities and Exchange Commission pursuant to a registration
statement on Form S-3. The issuance of the shares subject to
the unexercised warrants will be submitted to the Stockholders
for approval at the Annual Meeting of Stockholders currently
scheduled for March 31, 2000.
(d) None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 -- Computation of Earnings per Common Share
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K
None.
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE FISCAL QUARTER ENDED JANUARY 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
January 31, October 31,
2 0 0 0 1 9 9 9
------- -------
ASSETS
------
Current assets:
Cash and temporary investments $ 237,063 $ 1,140,893
Marketable securities 175,000 175,000
Accounts receivable, net of allowance for
doubtful accounts of $17,500 and $0,
respectively 798,841 1,312,148
Tuition receivable, net of allowance for
doubtful accounts of $240,754 and $213,817,
respectively 2,753,209 2,176,960
Inventories 541,222 472,341
Prepaid expenses and other current assets 379,210 202,114
------------ -----------
Total current assets 4,884,545 5,479,456
Property, plant and equipment - net of
accumulated depreciation of $1,451,744 and
$1,387,170, respectively 2,050,805 2,072,581
Other assets:
Deferred acquisition costs 205,126 157,493
Non-current tuition receivable, net of
allowance for doubtful accounts of $80,251
and $71,273, respectively 300,296 309,274
Notes receivable 159,327 159,327
Test passage bank and test development, net
of accumulated amortization of $1,922,665 and
$1,838,694, respectively 2,872,256 2,823,931
Software development costs, net of accumulated
amortization of $201,998 and $178,744,
respectively 298,014 313,172
Goodwill, net of accumulated amortization of
$322,681 and $280,527, respectively 3,911,084 3,953,238
Non-compete agreements, net of accumulated
amortization of $190,285 and $172,124,
respectively 309,715 327,876
Loan origination costs 173,481 200,263
Deferred income taxes 838,310 415,400
Other assets 246,278 172,406
----------- -----------
Total assets $16,249,237 $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
January 31, October 31,
2 0 0 0 1 9 9 9
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Line of credit $ 400,000 $ 400,000
Current maturities of long-term debt 529,183 503,799
Current maturities of capitalized lease
obligations 14,459 14,002
Accounts payable and accrued expenses 1,193,806 1,482,082
Deferred revenue 1,003,495 --
----------- -----------
Total current liabilities 3,140,943 2,399,883
Long-term debt:
Subordinated debt 4,000,000 4,000,000
Long-term debt, net of current portion 2,955,178 3,103,470
Long-term capitalized lease obligations,
net of current portion 27,386 31,204
----------- ----------
Total liabilities 10,123,507 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, 2,141,801 shares
issued and outstanding, respectively 214 214
Additional paid-in capital 5,052,479 5,052,479
Deferred interest (441,056) (470,460)
Unearned compensatory stock (17,626) (19,965)
Retained earnings 1,531,719 2,287,592
----------- -----------
Total stockholders' equity 6,125,730 6,849,860
----------- -----------
Total liabilities & stockholders' equity $16,249,237 $16,384,417
=========== ===========
[FN]
See notes to consolidated financial statements.
</FN>
F - 2
<PAGE> F-3
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Three Months Ended
January 31,
2 0 0 0 1 9 9 9
------- -------
Assessment revenues $ 716,438 $ 1,043,635
Educational delivery revenues 587,107 1,110,591
Instructional revenues 261,822 201,901
----------- -----------
Total net revenues 1,565,367 2,356,127
Cost of goods sold 866,741 966,576
----------- -----------
Gross profit 698,626 1,389,551
----------- -----------
Operating expenses:
Selling expenses 552,766 545,359
General and administrative expenses 1,144,563 1,033,858
----------- -----------
Total operating expenses 1,697,329 1,579,217
----------- -----------
Loss from operations (998,703) (189,666)
Other income (expense):
Interest expense (198,465) (215,974)
Loss on sale of assets -- (14,137)
Other income -- 56,569
Investment income 18,385 40,810
----------- -----------
Loss before income taxes (1,178,783) (322,398)
Income tax benefit (422,910) (122,041)
----------- -----------
Net loss (755,873) (200,357)
Other comprehensive loss, net of tax :
Unrealized holding loss on securities
arising during the period -- (861)
----------- ----------
Total comprehensive loss $ (755,873) $ (201,218)
============ ==========
Weighted average shares outstanding
Basic 2,141,801 2,141,801
Diluted 2,141,801 2,141,801
Loss per share
Basic $ (.35) $ (.09)
Diluted $ (.35) $ (.09)
[FN]
See notes to consolidated financial statements.
</FN>
F - 3
<PAGE> F-4
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
Page 1 of 2
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
January 31,
2 0 0 0 1 9 9 9
------- -------
OPERATING ACTIVITIES
Net loss $ (755,873) $ (200,357)
Adjustments to reconcile net loss to net
cash used from operating activities:
Depreciation and amortization 237,907 252,084
Deferred income taxes (400,364) (80,427)
Financial advisory services 2,339 8,188
Deferred interest 29,404 29,404
Bad debt expense 53,415 --
Loss on sale of auto -- 14,137
Changes in operating assets and liabilities:
Accounts receivable 495,807 248,570
Tuition receivable (603,186) (595,466)
Inventories (68,881) 25,345
Prepaid expenses (177,096) (290,712)
Other assets -- (46,431)
Deferred revenue 1,003,495 328,124
Accounts payable and accrued expenses (288,276) (793,009)
---------- ----------
NET CASH FLOWS FROM OPERATING ACTIVITIES (471,309) (1,100,550)
---------- ----------
INVESTING ACTIVITIES
Test passage bank and test development (132,296) (81,811)
Software development costs (8,096) --
Acquisition of fixed assets (42,798) (173,009)
Prepublication costs (75,429) --
Deferred acquisition costs (47,633) --
Proceeds from sale of auto -- 13,200
Acquisition of subsidiary -- (1,878,604)
---------- ----------
NET CASH FLOWS FROM INVESTING ACTIVITIES (306,252) (2,120,224)
---------- ----------
FINANCING ACTIVITIES
Net borrowings on note payable to bank -- (150,000)
Net borrowings on loan payable -- (2,956)
Stock subscriptions received -- 14,350
Repayment of capitalized lease obligations (3,361) --
Repayment of long-term debt (122,908) (147,934)
---------- ----------
NET CASH FLOWS FROM FINANCING ACTIVITIES (126,269) (286,540)
---------- ----------
NET CHANGE IN CASH AND TEMPORARY INVESTMENTS (903,830) (3,507,314)
CASH AND TEMPORARY INVESTMENTS
AT BEGINNING OF PERIOD 1,140,893 4,980,230
---------- ----------
CASH AND TEMPORARY INVESTMENTS AT END OF PERIOD $ 237,063 $1,472,916
========== ==========
[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
Three Months Ended
January 31,
2 0 0 0 1 9 9 9
------- -------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $180,291 $ 216,570
======== ==========
Income taxes paid $ -- $ 31,379
======== ==========
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
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 January 31, 2000 and October 31, 1999 and the
consolidated results of operations and comprehensive income
for the three months ended January 31, 2000 and 1999 and
consolidated cash flows for the three months ended January 31,
2000 and 1999.
The consolidated results of operations for the three months
ended January 31, 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 - PROSPECTIVE ACQUISITION - DuBOIS BUSINESS COLLEGE
- ----------------------------------------------------------
During the first quarter of the current fiscal year, the
Company, through its wholly-owned subsidiary, TESC, signed a
letter of intent to acquire all of the outstanding common stock
of the DuBois Business College ("DBC"), a Pennsylvania-based
two-year degree granting business college, and substantially
all of the assets and certain liabilities of Kenawell
Technologies, LLC ("KTL"), a limited liability company which
holds several of the real properties of DBC, for $3,200,000.
The Company intends to finance the transaction through the
issuance of approximately $2,000,000 in bank debt and a
promissory note to the seller of approximately $1,200,000. The
transaction, which the Company intends to complete during its
second quarter of Fiscal 2000, will be accounted for using the
purchase method of accounting.
F - 6
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - EMPLOYMENT AGREEMENT - CHIEF OPERATING OFFICER
- -------------------------------------------------------
On December 1, 1999, the Company entered into an employment
agreement with a key executive pursuant to which the executive
agreed to accept employment with the Company as its Chief
Operating Officer. The agreement is for a one-year term and
provides for automatic extensions each year 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 $150,000,
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, an incentive bonus based on
the attainment of certain profitability goals, and key man life
insurance. Among other provisions, the agreement includes a
non-compete clause for a one-year period following termination
of employment.
NOTE 4 - ISSUANCE OF STOCK OPTIONS
- ----------------------------------
In January 2000, the Company issued options to its Chief
Operating Officer to purchase 40,000 shares of its common stock
pursuant to the Company's Amended and Restated 1991 Stock
Option Incentive Plan (the "Plan") at an exercise price of
$2.125 per share, representing market value at the date of
grant.
In February 2000, the Company issued options to employees to
purchase an aggregate 73,275 shares of its common stock
pursuant to the Plan at an exercise price of $1.688 per share,
representing market value at the date of grant.
F - 7
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - 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 6 - LINE OF CREDIT
- -----------------------
In March 2000, the Company obtained a 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.
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 - 8
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - SEGMENT INFORMATION
- ----------------------------
<TABLE>
<CAPTION>
Assessment Delivery Instructional Total
---------- -------- ------------- -----
Three Months Ended January 31, 2000:
<S> <C> <C> <C> <C>
Revenues $ 716,438 $ 587,107 $ 261,822 $1,565,367
Loss before income taxes (460,822) (605,854) (112,127) (1,178,783)
Total segment assets 6,851,977 7,017,963 2,379,297 16,249,237
Three Months Ended January 31, 1999:
Revenues $1,043,635 $1,110,591 $ 201,901 $2,356,127
Loss before income taxes (164,551) (7,305) (150,542) (322,398)
Total segment assets 6,960,565 7,440,949 2,323,859 16,725,373
</TABLE>
Included in the assessment segment reporting are corporate
overhead expenses of approximately $195,000 and $173,000 for
the three months ended January 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 three month periods ended January 31,
2000 and 1999, is not considered material to the financial statements.
F - 9
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: March 16, 2000
<TABLE>
<CAPTION>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
EXHIBIT II
COMPUTATION OF EARNINGS PER COMMON SHARE
----------------------------------------
Three Months Ended
January 31,
2 0 0 0 1 9 9 9
------- -------
<S> <C> <C>
Basic earnings:
Net loss $ (755,873) $ (200,357)
---------- ----------
Shares: 2,141,801 2,141,801
Warrants to consultants -- --
Employee stock options -- --
Consultant stock options -- --
---------- ----------
Total weighted shares outstanding 2,141,801 2,141,801
---------- ----------
Basic earnings per common share $ (.35) $ (.09)
========== ==========
Diluted earnings:
Net loss $ (755,873) $ (200,357)
========== ==========
Shares:
Weighted common shares outstanding 2,141,801 2,141,801
Warrants to consultants -- --
Employee stock options -- --
Consultant stock options -- --
---------- ----------
Total weighted shares outstanding 2,141,801 2,141,801
---------- ----------
Diluted earnings per common share $ (.35) $ (.09)
========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the consolidated balance sheet and statements of income
filed as part of the Quarterly Report on Form 10-QSB for the fiscal
quarter ended January 31, 2000 and is qualified in its
entirety by reference to such report on Form 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-2000
<PERIOD-END> JAN-31-2000
<CASH> 237,063
<SECURITIES> 175,000
<RECEIVABLES> 3,810,304
<ALLOWANCES> 258,254
<INVENTORY> 541,222
<CURRENT-ASSETS> 4,884,545
<PP&E> 3,502,549
<DEPRECIATION> 1,451,744
<TOTAL-ASSETS> 16,249,237
<CURRENT-LIABILITIES> 3,140,943
<BONDS> 6,982,564
0
0
<COMMON> 214
<OTHER-SE> 6,125,516
<TOTAL-LIABILITY-AND-EQUITY> 16,249,237
<SALES> 1,565,367
<TOTAL-REVENUES> 1,565,367
<CGS> 866,741
<TOTAL-COSTS> 1,697,329
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 198,465
<INCOME-PRETAX> (1,178,783)
<INCOME-TAX> (422,910)
<INCOME-CONTINUING> (755,873)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (755,873)
<EPS-BASIC> (.35)
<EPS-DILUTED> (.35)
</TABLE>
