<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 1996
_____ Transition report pursuant to Section 13 or 15(d) of the Exchange Act
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, Fields Lane, Brewster, New York 10509
- ---------------------------------------------------------------------------
(Address of principal executive offices)
(914) 277-8100
- ---------------------------------------------------------------------------
(Issuer's telephone number, including area code)
- ---------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes ____X____ No _________
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 3, 1996:
------------------------
7,639,322 shares of Common Stock, par value $.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, 1996 are attached to this Report, commencing at page F-1.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company's revenues are derived from: the sale of its Degrees of
Reading Power Tests ("DRP") and Degrees of Word Meaning Tests ("DWM"), the
sale of ancillary materials, and test scoring and reporting services. Tests
are sold pursuant to specific contracts with state and local governments and
through catalog sales.
RESULTS OF OPERATIONS
REVENUES. For the three-month period ended July 31, 1996, the
Company's total net revenues increased 6.9% versus the comparable 1995 period
($563,839 in 1996 versus $527,231 in 1995). For the nine-month period ended
July 31, 1996, the Company's total net revenues increased 2.9% versus the
comparable 1995 period ($1,848,925 in 1996 versus $1,797,347 in 1995). The
overall increase in total net revenues for the nine-month period ended
July 31, 1996 represents the net of the significant increase in catalog sales
over the decrease in contract income.
For the three-month period ended July 31, 1996, contract income
increased to $48,361 from $26,006 in the comparable 1995 period. For the
nine-month period ended July 31, 1996, contract income decreased 23.8% versus
the comparable 1995 period ($575,841 in 1996 versus $755,221 in 1995). Contract
income now represents 8.6% of third quarter sales versus 4.9% of third quarter
sales in 1995. For the nine-month period ended July 31, 1996, contract income
represented 31.1% of total sales versus 42.0% in the comparable 1995 period.
The Company had projected this decrease since the second half of fiscal year
1994, when the New York City contract was not renewed for fiscal year 1996.
For the three-month period ended July 31, 1996, catalog sales for
shelf tests and associated products increased 2.8% versus the comparable 1995
period ($515,478 in 1996 versus $501,225 in 1995). For the nine-month period
ended July 31, 1996, catalog sales increased 22.2% versus the comparable 1995
period ($1,273,084 in 1996 versus $1,042,126 in 1995). Catalog sales now
represent 68.9% of total net revenues for the nine-month period ended July 31,
1996 versus 58.0% of total net revenues in the comparable 1995 period. The
Company believes that the decline in the rate of growth of catalog sales in
the third quarter of 1996 from its rate of growth during the earlier fiscal
quarters of 1996 is a function of timing and seasonality.
COSTS AND EXPENSES. For the three-month period ended July 31, 1996,
cost of goods sold decreased 9.8% versus the comparable 1995 period ($166,524
in 1996 versus $184,531 in 1995). For the nine-month period ended July 31,
1996, cost of goods sold decreased by 1.1% versus the comparable 1995 period
($530,485 in 1996 versus $536,517 in 1995). Costs of goods sold as a
percentage of sales for the three-month period ended July 31, 1996 decreased
5.5% versus the comparable 1995 period (29.5% in 1996 versus 35.0% in 1995).
Cost of goods sold as a percentage of sales for the nine-month period ended
July 31, 1996 decreased 1.2% versus the comparable 1995 period (28.7% in 1996
versus 29.9% in 1995). The change is due to an overall change in product mix
between catalog sales and contract income.
For the three-month period ended July 31, 1996, selling expenses
increased 55.4% versus the comparable 1995 period ($178,587 in 1996 versus
$114,908 in 1995). For the nine-month period ended July 31, 1996, selling
expenses increased 25.3% versus the comparable 1995 period ($498,407 in 1996
versus $397,704 in 1995). This increase is attributable to the Company's
increased expenditures in preparation for the fall selling season, which
included increased advertising and promotional mailings and the hiring of two
new educational consultants to represent the Company in the West and Southwest
markets.
For the three-month period ended July 31, 1996, general and
administrative expenses increased 15.4% versus the comparable 1995 period
($232,971 in 1996 versus $201,881 in 1995). For the nine-month period ended
July 31, 1996, general and administrative expenses increased 12.0% versus the
comparable 1995 period ($636,695 in 1996 versus $568,593 in 1995). This
increase in spending results from the Company's decision in prior years to
reconfigure its organization and operations in order to enhance opportunities
for future growth.
In the three-month period ended July 31, 1996, the Company spent
$28,238 on product development. In the nine-month period ended July 31, 1996,
the Company spent $49,418 on product development. There were no comparable
expenditures in 1995. The Company is currently working on a new product that
is not yet ready for commercial distribution. This expenditure is consistent
with one of the Company's core strategies of expanding the Company's revenue
opportunities outside the Company's current marketplace.
For the three-month period ended July 31, 1996, interest expense
increased 85.0% versus the comparable 1995 period ($16,048 in 1996 versus
$8,674 in 1995). For the nine-month period ended July 31, 1996, interest
expense increased 11.1% versus the comparable 1995 period ($47,108 in 1996
versus $42,389 in 1995). This increase was due to the absence of an interest
refund comparable to that which was made by the Company's bank in the third
quarter of 1995.
For the three-month period ended July 31, 1996, investment income
increased 4.7% versus the comparable 1995 period ($43,978 in 1996 versus
$42,012 in 1995). For the nine-month period ended July 31, 1996, interest
income was essentially flat versus the comparable 1995 period ($125,878 in
1996 versus $125,391 in 1995).
Net Income and Earnings per Share. For the three-month period ended
July 31, 1996, net after-tax income decreased to a ($673) loss from a $45,604
profit in the comparable 1995 period. For the nine-month period ended
July 31, 1996, net after-tax income decreased 40.0% versus the comparable
1995 period ($159,438 in 1996 versus $265,900 in 1995). This decrease was
primarily due to increased operating expenses in 1996, including new marketing
initiatives and product development.
For the three-month period ended July 31, 1996, earnings per share
were essentially flat versus the comparable 1995 period ($0.00 in 1996 and
1995). For the nine-month period ended July 31, 1996, earnings per share
decreased 33.3% versus the comparable 1995 period ($.02 in 1996 versus $.03
in 1995).
LIQUIDITY AND CAPITAL RESOURCES
Working capital, which consists principally of cash, cash
equivalents, marketable securities and accounts receivable, was $3,435,283 on
July 31, 1996 versus $2,923,276 on October 31, 1995. The increase in working
capital was primarily due to an increase in paid-in capital from the exercise
of warrants and stock options by unaffiliated third parties, as well as to
profits from operations.
For the nine-month period ended July 31, 1996, net cash flows from
operating activities were $516,025 (versus $565,027 in the comparable 1995
period). Additionally, for the nine-month period ended July 31, 1996, the
Company invested $253,804 to increase the size of its Test Passage Bank
(versus $238,809 in the comparable 1995 period), $45,477 in property, plant
and equipment (versus $154,288 in the comparable 1995 period) and $94,239
readying its new DRP-->BookLink software product for market (versus no
expenditures for such product development in the comparable 1995 period).
In the nine-month period ended July 31, 1996, the Company purchased $108,633
in marketable debt securities (versus $79,964 in the comparable 1995 period).
For the nine-month period ended July 31, 1996, the Company had a net
cash inflow from financing activities of $413,439, as compared to a net cash
outflow from financing activities of ($181,009) for the comparable 1995 period.
This change was due to the receipt of proceeds from the exercise of warrants
and stock options, less deferred offering costs and principal payments on its
industrial development bond.
In May 1996, the Company had a balloon payment of $252,500 on its
mortgage loan for the addition to its facility which was completed in 1991.
The deadline for the balloon payment has been extended by the bank as the
Company evaluates alternative refinancing proposals. The Company is current
on all interest payments. The Company currently anticipates closing a
refinancing by fiscal year end. The Company has no other material commitments
for capital or other capital expenditures and is not party to any arrangement
that would adversely impact the Company's liquidity.
<PAGE>
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
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.
<PAGE>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
INDEX TO FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER ENDED JULY 31, 1996
Balance Sheets F-1
Statements of Income F-3
Statements of Cash Flows F-4
Notes to Financial Statements F-5
<PAGE>
<TABLE>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC. (F-1)
BALANCE SHEETS (1 of 2)
(UNAUDITED)
<CAPTION>
July 31, October 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and temporary investments $1,044,616 $ 617,305
Marketable securities 2,250,190 2,114,243
Accounts receivable 347,899 351,491
Inventories 188,897 152,296
Prepaid expenses and other current
assets 94,799 214,021
---------- ----------
Total current assets 3,926,401 3,449,356
Property, plant and equipment - net of
accumulated depreciation of
$1,684,486 and $1,593,208,
respectively 1,808,768 1,869,141
Other assets:
Deferred offering costs -- 236,624
Loan receivable 400,000 400,000
Test passage bank, net of accumulated
amortization of $848,696 and
$673,626, respectively 2,514,222 2,435,488
Software development costs 94,239 --
Other assets 20,129 26,123
---------- ----------
Total assets $8,763,759 $8,416,732
========== ==========
<FN>
See notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC. (F-2)
BALANCE SHEETS (2 of 2)
(UNAUDITED)
<CAPTION>
July 31, October 31,
1996 1995
------------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of obligation under
industrial revenue bond $ 315,000 $ 315,000
Accounts payable and accrued expenses 174,261 210,649
Corporation taxes payable 1,857 431
---------- ----------
Total current 491,118 526,080
Long-term debt:
Obligation under industrial revenue bond,
less current portion 520,000 571,250
Deferred income taxes 541,456 602,162
---------- ----------
Total liabilities 1,552,574 1,699,492
---------- ----------
Stockholders' equity:
Preferred stock, $.0001 par value, 5,000,000
authorized, 1,500 issued and outstanding -- --
Common stock, $.0001 par value, 20,000,000
authorized, 7,604,322 and 6,899,400 shares
issued and outstanding, respectively 760 690
Additional paid-in capital 3,931,448 3,609,978
Stock subscription receivable (14,350) --
Unrealized holding loss (13,510) (40,824)
Retained earnings 3,306,837 3,147,396
---------- ----------
Total stockholders' equity 7,211,185 6,717,240
---------- ----------
Total liabilities & stockholders' equity $8,763,759 8,416,732
========== ==========
<FN>
See notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC. (F-3)
STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
Nine Months Ended Three Months Ended
July 31, July 31,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Contract income $ 575,841 $ 755,221 $ 48,361 $ 26,006
Catalog sales 1,273,084 1,042,126 515,478 501,225
---------- ---------- ---------- ----------
Total net revenue 1,848,925 1,797,347 563,839 527,231
Cost of goods sold 530,485 536,517 166,524 184,531
---------- ---------- ---------- ----------
Gross profit 1,318,440 1,260,830 397,315 342,700
---------- ---------- ---------- ----------
Operating expenses:
Selling expenses 498,407 397,704 178,587 114,908
General and administrative
expenses 636,695 568,593 232,971 201,881
Product development 49,418 -- 28,238 --
---------- ---------- ---------- ----------
Total operating expenses 1,184,520 966,297 439,796 316,789
---------- ---------- ---------- ----------
Income (loss) from operations 133,920 294,533 (42,481) 25,911
Other income (expense):
Interest expense (47,108) (42,389) (16,048) (8,674)
Investment income 125,878 125,391 43,978 42,012
---------- ---------- ---------- ----------
Income (loss) before income taxes 212,690 377,535 (14,551) 59,249
Income taxes (benefit) 53,252 111,635 (13,878) 13,645
---------- ---------- ---------- ----------
Net income (loss) $ 159,438 $ 265,900 $ (673) $ 45,604
========== ========== ========== ==========
Weighted average shares
outstanding
Primary 7,868,555 10,339,150 7,868,555 10,339,150
Fully diluted 7,868,555 10,339,150 7,868,555 10,339,150
Earnings per share
Primary $ .02 $ .03 $ -- $ --
Fully diluted $ .02 $ .03 $ -- $ --
<FN>
See notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC. (F-4)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Nine Months Ended
July 31,
1996 1995
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 159,438 $ 265,900
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 286,913 255,369
Deferred income taxes (60,706) (67,010)
Financial advisory services 79,125 79,125
Changes in operating assets and liabilities:
Accounts receivable 3,596 2,623
Inventories (36,601) (136,743)
Other current assets 119,222 195,317
Accounts payable (34,962) (29,554)
---------- ----------
NET CASH FLOWS FROM OPERATING ACTIVITIES 516,025 565,027
---------- ----------
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (45,477) (154,288)
Test passage bank (253,804) (238,809)
Software development costs (94,239) --
Purchase of marketable debt securities (108,633) (79,964)
---------- ----------
NET CASH FLOWS FROM INVESTING ACTIVITIES (502,153) (473,061)
---------- ----------
FINANCING ACTIVITIES
Principal payments on industrial revenue
bond obligation (51,250) (56,250)
Deferred offering costs (164,478) (124,759)
Proceeds from exercise of options 577,167 --
Proceeds from exercise of warrants 52,000 --
---------- ----------
NET CASH FLOWS FROM FINANCING ACTIVITIES 413,439 (181,009)
---------- ----------
NET CHANGE IN CASH AND TEMPORARY
INVESTMENTS 427,311 (89,043)
CASH AND TEMPORARY INVESTMENTS
AT BEGINNING OF PERIOD 617,305 984,435
---------- ----------
CASH AND TEMPORARY INVESTMENTS
AT END OF PERIOD $1,044,616 $ 895,392
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 47,636 $ 50,347
========== ==========
Income taxes paid $ 29,000 $ 11,368
========== ==========
</TABLE>
<PAGE>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC. (F-5)
NOTES TO FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------------
In the opinion of management, the accompanying financial statements of
Touchstone Applied Science Associates, Inc. contain all adjustments necessary
to present fairly the Company's financial position as of July 31, 1996 and
October 31, 1995 and the results of operations for the nine and three months
ended July 31, 1996 and 1995 and cash flows for the nine months ended July
31, 1996 and 1995.
The accounting policies followed by the Company are set forth in Note A to the
Company's financial statements included in its Annual Report on Form 10-KSB
for the year ended October 31, 1995.
The results of operations for the nine and three months ended July 31, 1996
and 1995 are not necessarily indicative of the results to be expected for the
full year.
NOTE B - STOCKHOLDERS' EQUITY
- -----------------------------
Incentive Stock Options
- -----------------------
In May 1996, 10,000 incentive stock options were exercised for the purchase of
30,000 shares of common stock for $1.41 per share. As of July 31, 1996,
$14,350 was owed on these shares and has been reflected in stock
subscriptions receivable.
On July 10, 1996, the Company granted 170,000 options under the Company's
Amended and Restated 1991 Stock Option Incentive Plan. These options may be
exercised subsequent to July 10, 1997 at an exercise price of $1.0938 per
share.
<PAGE>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC. (F-6)
NOTES TO FINANCIAL STATEMENTS
NOTE C - DIRECTORS STOCK OPTION PLAN
- ------------------------------------
In 1996, the Company adopted a Directors Stock Option Plan whereby options may
be granted to purchase up to an aggregate of 100,000 shares of the Company's
common stock to directors of the Company who are not officers or employees of
the Company or otherwise eligible to receive awards under the Amended and
Restated 1991 Stock Option Incentive Plan. Pursuant to the plan, eligible
directors would receive an option to purchase 5,000 shares of the Company's
common stock on the date the director first becomes eligible. The eligible
director would subsequently receive an option to purchase 2,500 shares of the
Company's common stock on the date of each succeeding annual meeting of the
stockholders, unless the director's term ends on that date. Each option
granted is exercisable at the fair market value of the stock on the date
granted, and may be exercised for a 9 year period commencing one year from the
date of the grant.
On March 29, 1996, the Company granted an aggregate of 10,000 options to two
non-employee directors. The options are exercisable at $2.1875.
NOTE D - SUBSEQUENT EVENT
- -------------------------
In May 1996, the Company had a $252,500 balloon payment due on its mortgage
which financed its 1991 facilities expansion. The Company obtained an extension.
<PAGE>
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, Chief Executive Officer and Treasurer
(principal financial officer)
Date: September 5, 1996
<TABLE>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
EXHIBIT II
COMPUTATION OF EARNINGS PER COMMON SHARE
----------------------------------------
<CAPTION>
Nine Months Ended Three Months Ended
July 31, July 31,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary earnings:
Net income (loss) $ 159,438 $ 265,900 $ (673) $ 45,604
Shares:
Weighted average
Number of common shares
and common share equivalents
outstanding 7,868,555 10,339,150 7,868,555 10,339,150
Primary earnings per common
share $ .02 $ .03 $ -- $ --
========== ========== ========== ==========
Fully diluted earnings:
Net income (loss) $ 159,438 $ 265,900 $ (673) $ 45,604
Net (after tax) interest expense
related to convertible debt -- -- -- --
---------- ---------- ---------- ----------
Net income (loss) as adjusted $ 159,438 $ 265,900 $ (673) $ 45,604
========== ========== ========== ==========
Shares:
Weighted average number of
common shares and common share
equivalents outstanding 7,868,555 10,339,150 7,868,555 10,339,150
Fully diluted earnings per
common share $ .02 $ .03 $ -- $ --
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet and Statements of Income filed as part of the report on Form 10QSB and is
qualified in its entirety by reference to such report on Form 10QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> JUL-31-1996
<CASH> 1,044,616
<SECURITIES> 2,250,190
<RECEIVABLES> 347,899
<ALLOWANCES> 0
<INVENTORY> 188,897
<CURRENT-ASSETS> 3,926,401
<PP&E> 3,493,254
<DEPRECIATION> 1,684,486
<TOTAL-ASSETS> 8,763,759
<CURRENT-LIABILITIES> 491,118
<BONDS> 0
0
0
<COMMON> 760
<OTHER-SE> 7,210,425
<TOTAL-LIABILITY-AND-EQUITY> 8,763,759
<SALES> 1,848,925
<TOTAL-REVENUES> 1,974,803
<CGS> 530,485
<TOTAL-COSTS> 1,184,520
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,108
<INCOME-PRETAX> 212,690
<INCOME-TAX> 53,252
<INCOME-CONTINUING> 159,438
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 159,438
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
