TASA Research Note

Touchstone Applied Sciences (TASA)
By: Robert Davis

On June 4th, Touchstone Applied Sciences (OTCBB:TASA) pre-announced that the Company "expects substantial increases in second-quarter revenues compared to a year earlier," and that these increases would generate improved operating income for the quarter. However, the Company concurrently announced that the second quarter would also see "a non-cash charge related to a change in accounting for goodwill for its post-secondary school."

As reported in earlier Research Notes, TASA has announced the signing of a letter of intent to sell Mildred Elley, its post-secondary proprietary school, in a transaction that it expects to finalize by the end of the Company's third fiscal quarter, ending on July 31st. As previously discussed, the Company's strategic direction is now focused more strongly on Educational Assessment, which has emerged as a significant growth sector. In addition, Elley, acquired in 1998, failed to meet original expectations. As a result, this divestiture should have a positive impact on the Company's bottom line in future periods.

Last year, as part of a series of new accounting rules covering the treatment of acquisitions and divestitures, the Financial Accounting Standards Board issued SFAS No. 142 - Goodwill and Other intangible Assets. When a Company pays more for an acquisition than its appraised value, this "premium" is recorded on the acquirer's balance sheet as an asset called "goodwill." In the past, this goodwill was written off over its presumed life, which might be as long as 40 years, with this non-cash amortization expense appearing on the Company's P&L as "Amortization of Goodwill."

Under this new Statement of Financial Accounting Standards, goodwill is no longer amortized. Instead, if its value can still be substantiated, the acquiring Company can leave it on its balance sheet indefinitely. However, this new Standard also creates an "impairment" test that must be applied annually to substantiate its value; if it fails to pass the test, the Company is required to write it off as an "impairment of goodwill."

Since it was expected that a significant number of U.S. companies would announce "impairment of goodwill" write-offs, this new SFAS includes the provision that such rite's can be shown as "non-recurring" if they are taken during the first half of 2002.

The Company's management is optimistic regarding the remainder of the fiscal year. To quote this press release, "With our first-half results running well ahead of last year and to help propel second-half revenues, we have increased our expenditures for marketing considerably," so as to support stronger second quarter results.

We continue to rate this stock a Buy.

J.M. Dutton& Associates, LLC. John M. Dutton, President and Supervisory Analyst, 1129 Manning Drive, Suite 310, El Dorado Hills, CA 95762 Phone (916) 941-4985, Fax (978) 418-6422 Email: [email protected] Web site: www.JMDutton.com

Information, opinions or recommendations contained in this research note are submitted solely for advisory and information purposes. The information used and statements of fact made have been obtained from sources considered reliable but we neither guarantee nor represent the completeness or accuracy. Such information and the opinions expressed are subject to change without notice. This research note is not intended as an offering or a solicitation of an offer to buy or sell the securities mentioned or discussed. Neither the Firm, its principals, nor the assigned analysts own or trade shares of any company covered. The Firm does not accept any equity compensation. Anyone may enroll a company for research coverage, which costs US $22,000 prepaid for one-year. Reports are performed on behalf of the public, and are not a service to any company. The analysts are responsible only to the public, and are paid in advance to eliminate pecuniary interests and insure independence. Please read full disclosure and other reports and notes on the Company at www.JMDutton.com.