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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934: For the fiscal year ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934: For the transition period from ____ to ____
Commission file number 0-6669
FORWARD INDUSTRIES, INC.
(Name of small business issuer in its charter)
<TABLE>
<CAPTION>
<S> <C>
New York 13-1950672
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
400 Post Avenue, Westbury, NY 11590
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(Address of principal executive offices) (Zip Code)
</TABLE>
(516) 338-0700
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(Issuer's Telephone Number, including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
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(Title of class)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 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 [ ].
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were: $13,028,888.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date
within the past 60 days was:
Approximately $4,695,600, based on the average of the closing bid price ($.75)
and closing asked price ($.84) as reported on the NASDAQ SmallCap Market on
December 23, 1998.
As of December 23, 1998, 5,906,141 Shares of the issuer's Common Stock, $.01
par value were outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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PART I
This Annual Report on Form 10-KSB contains forward looking statements that
involve certain risks and uncertainties. The Company's actual results could
differ materially from the results discussed in the forward looking statements.
See "Cautionary Statement Regarding Forward - Looking Statements" contained in
Part II, Item 6 of this Report.
ITEM 1 - DESCRIPTION OF BUSINESS
GENERAL
Forward Industries, Inc. (together with its subsidiaries, unless the
context requires otherwise, "Forward" or the "Company") was incorporated in
1961 under the laws of the State of New York. For several years prior to the
1989 acquisition of Koszegi Industries, a manufacturer of soft-sided carrying
cases (see "Products"), the Company's sales were approximately equally divided
between those of vinyl advertising specialties and loose-leaf ring and post
binders manufactured by the Company. During recent years, Koszegi Industries,
the carrying case business, progressively became the most significant division
of the Company's operations. In September 1997, the Company sold its assets
relating the production of advertising specialties and ceased operating that
portion of its business
The Company has been producing soft-sided carrying cases in its South
Bend, Indiana manufacturing plant and overseas through contract-manufacturers.
However, with the increase in carrying case production occurring in the Asian
market, the Company established an alternative source of domestic production,
thereby enabling the Company to close its manufacturing operation in South Bend
and eliminate the related costs of domestic manufacture. The Company expects
the facility will be closed on or about February 28, 1999. See "Production and
Materials." Since the majority of the Company's production of carrying cases is
made in the Asian market, a senior officer of the Company had been residing in
Hong Kong since July 1995, See "Marketing and Distribution". Upon employing an
executive director for its Hong Kong operations this officer returned to the
United States in July 1998.
In October 1998, Jerome E. Ball joined the Company as its new Vice
Chairman of the Board and Chief Executive Officer, replacing Theodore H.
Schiffman, who will maintain his position as Chairman through March 1999 and
will become Chairman Emeritus and a consultant to the Company thereafter.
The Company has its principal executive offices at 400 Post Avenue,
Westbury, New York 11590. The Company's principal manufacturing facility is
presently located at 702 South Chapin Street, South Bend, Indiana 46624 (the
"South Bend Facility"). The Company also maintains additional office and
quality control facilities in Hong Kong and has other minor leases for office
or warehouse space in Denmark, Australia and Scotland. See Item 2, "Description
of Property."
PRODUCTS
Custom Carrying Cases. The Company designs and manufactures custom
soft-sided carrying cases and bags from leather, nylon, vinyl and other
synthetic fabrics (the "carrying case business") through its wholly-owned
subsidiary, Koszegi Industries, Inc. These carrying cases and bags are utilized
for transporting portable products such as cellular telephones, medical
instruments, computers, and hand tools. The carrying case business accounted
for all of the Company's net sales in the fiscal year ended September 30, 1998
("Fiscal 1998") approximately 85% of the Company's net sales during its fiscal
year ended September 30, 1997 ("Fiscal 1997") and approximately 82% of such net
sales during its fiscal year ended September 30, 1996 ("Fiscal 1996"),
respectively. Since its acquisition of the carrying case business in 1989, the
Company has concentrated its marketing and development efforts on original
equipment manufacturers in the communications (principally cellular
telephones), computer and medical instrumentation industries. In April 1995,
the Company expanded its product line to include laptop/notebook computer cases
marketed for general retail distribution under the Terrapin(TM) brand name. See
"Marketing and Distribution."
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Advertising Specialties. Through Fiscal 1997, the Company was engaged
in the design, manufacture and sale of advertising specialties fabricated from
vinyl (the "advertising specialties business"). Advertising specialties are
"intrinsically useful" articles which have imprinted on them an advertiser's
name and advertising message and are usually distributed by the advertiser
without cost to the recipients. Advertising specialties may also be utilized as
promotional gift items. The advertising specialties line accounted for
approximately 5% of the Company's net sales during Fiscal 1997, and
approximately 18% and 20% of such sales during Fiscal 1996 and 1995,
respectively. The advertising specialties business was sold in September 1997
for $500,000 in cash and secured promissory notes in the principal amounts of
$850,000 and $95,000 (an aggregate of $1,445,000). In addition, the buyer
agreed to assume certain liabilities of a subsidiary, including a portion of
its lease obligations with respect to the South Bend Facility.
MARKETING AND DISTRIBUTION
Custom Carrying Cases. The Company markets its custom carrying cases
to original equipment manufacturers, principally in the communications, medical
and testing and measurement equipment industries. Such cases are manufactured
to customer specifications and usually bear the customer's identifying logo
imprint. During Fiscal 1998, approximately 21% of the Company's sales were made
through five independent sales representative organizations which receive a
commission equal to 5% of net sales made by them. The balance of such sales
were made by Company personnel. In Fiscal 1998 and 1997, approximately 31% and
15% of custom case sales, respectively, were made to customers outside of the
United States (approximately 5% in Fiscal 1996). The Company is increasing its
emphasis upon such foreign sales in Asia and Europe. The Company has no
long-term agreements with any of its customers. Two of the Company's customers,
together with their respective international affiliates, accounted for
approximately 39% and 16%, respectively, of the Company's sales in Fiscal 1998;
and two of the Company's customers together with their respective international
affiliates, accounted for approximately 28% and 21%, respectively, of the
Company's net sales from continuing operations during Fiscal 1997. The loss of
either of these customers would have a material adverse effect on the Company.
In order to reduce its reliance upon major customers, whose orders may vary
substantially from period to period depending upon the success of their
products utilizing the Company's carrying cases, the Company is seeking to
increase and diversify its customer base, particularly in Asia and Europe. The
Company presently has approximately 100 active carrying case customers.
Computer Cases. In April 1995, the Company commenced marketing a line
of notebook computer carrying cases to retailers and consumers under the
Terrapin(TM) brand name. These cases, which are manufactured in nylon, leather
and hardshell thermoformed materials, provide storage space for a computer and
related items and may be utilized as a "portable office" by the computer user.
Although sales of the Terrapin(TM) products have not met expectations,
management believes that the growth of the notebook computer market offers it
an opportunity to diversify its product line, and to establish a brand identity
for its products under the Terrapin(TM) name. The target sales areas for this
line were initially large retail chain computer outlets, large direct mail
order houses and small computer equipment manufacturers and resellers, which
the Company is now seeking to expand to original equipment manufacturers. The
Company is also selling its Terrapin(TM) computer case line through Internet
marketing companies and is evaluating other business strategies for its
Terrapin(TM) line.
Advertising Specialties. Through Fiscal 1997, the Company sold
substantially all of its advertising specialties within the United States. Most
sales were to sales promotion and advertising distributors who placed orders
from a full-color product catalog prepared by the Company. These distributors
placed their orders with the Company for specific products requested by their
customers. The average order placed by a distributor was approximately
$300-500. The distributor was billed directly by the Company and the
distributor, in turn, billed its customers. The Company marketed its
advertising specialties under its registered trademark FORWARD(R). A small
percentage of sales were made directly to retailers. The Company sold its
assets related to this product line, together with its registered trademark
FORWARD(R), in September 1997, at which time it ceased producing and selling
advertising specialties.
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Backlog. At September 30, 1998, the Company's backlog of unfilled
orders was approximately $2,455,000, as compared to an order backlog of
approximately $1,969,000 at September 30, 1997. The Company anticipates that
all of its backlog will be shipped during the current fiscal year.
Credit Risk. The Company sells its products on credit terms customary
in the industry, and has not had significant credit problems with its
customers. At September 30, 1998, three of the Company's largest customers and
their international affiliates accounted for approximately 67% of the Company's
accounts receivable (three customers accounting for 46% at September 30, 1997).
Any failure of such customers to pay the sums they owe to Company when due
would have a material adverse effect on the Company.
Certain Seasonal Sales. The Company's sales of advertising specialties
were seasonal. Custom cases are not seasonal, but the first and fourth fiscal
quarters have been historically stronger than the second and third fiscal
quarters.
PRODUCTION AND MATERIALS
The principal materials used in the manufacture of the Company's
products are vinyl, nylon and other synthetic fabrics, leather, metal and
plastic parts (such as corners, clasps, buckles, loops, and hinges and other
hardware), foam padding, cardboard, pads and pencils, all of which are obtained
according to the Company's specifications from domestic and foreign suppliers.
The Company does not have any long-term agreements with any supplier and there
are adequate available alternative sources of supply for all of its materials.
Manufacturing of custom carrying cases generally consists of die
cutting fabrics, leather and vinyl from rolls, heat sealing, gluing, sewing,
and decorating (affixing logos) by means of silk screening, hot-stamping,
embroidering, or embossing.
In order to achieve lower production costs for its products and to
enable the Company to increase its production capacity without incurring
significant capital costs for expanded facilities and equipment, the Company
has, since 1992, utilized foreign contractors to manufacture its carrying cases
to the extent practicable. Such foreign contractors produced approximately 78%
of the Company's revenues of carrying cases in Fiscal 1998 and approximately
63% in Fiscal 1997. The Company does not have any written agreements with any
of such contractors to continue to supply the Company with finished product.
During recent years, production at the Company's South Bend
manufacturing facility has been declining due to cost competition from overseas
suppliers. As a result, the Company could no longer maintain this facility
profitably due to under-utilized capacity at the plant. In September 1998, the
Company announced it would close its domestic manufacturing operations by
February 28, 1999. It also announced that production demands which require
domestic manufacture will be produced by MedCovers, Inc., in Raleigh, North
Carolina, under contractual agreement between the two parties. The Company has
sold to MedCovers, Inc. specialized equipment utilized in the manufacture of
its products, provided training in all aspects of its production and will
retain quality assurance capability at the MedCovers, Inc. plant.
During Fiscal 1998, one of the Company's foreign contractors produced
approximately 46 % of the Company's carrying cases and approximately 44% in
Fiscal 1997. The failure of such contractor to continue to supply the Company
with product would have a material adverse effect on the Company. The Company
has recently begun to expand the number of foreign contractors it uses to
reduce such reliance.
In order to assure that product manufacturing by foreign contractors
meets the Company's standards, the Company maintains a quality control
inspection facility in Hong Kong. The Company experienced quality control
problems with some of its product manufactured by foreign contractors in the
first quarter of Fiscal
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1996. Such problems have been corrected and management is working with
suppliers and customers to assure no repetition of these problems.
The Company's overseas contractors are located principally in Asia,
but the Company intends (if it has the funds available) to expand its
production capability in Europe as well as in Asia. Management believes that
such expansion will facilitate delivery of product to foreign customers and
provide for lower cost production of carrying cases for which there is
significant demand. Such expansion will require further financing, for which no
arrangements have been made. In some instances, the Company may provide
equipment to overseas contractors or share in its cost.
Because of the growing importance of foreign production to the
business of the Company, management determined that it would be in the best
interests of the Company to assign Michael Schiffman, Executive Vice President,
to be resident in Hong Kong commencing in July 1995 for a period to be
determined. Mr. Schiffman's primary responsibilities in Hong Kong were to
identify foreign contractors which meet the Company's standards as to service,
price and quality, to diversify such production sources to minimize continued
dependence on a small group of suppliers, to enable the Company to allocate
production projects among the most efficient producers, and to supervise the
quality control operations. In addition, Mr. Schiffman was engaged in
establishing marketing and distribution arrangements for the Company's
Terrapin(TM) line in Asia. Upon the appointment and training of a Managing
Director, Mr. Schiffman relocated to the corporate headquarters of the Company
in the United States in July 1998.
Most of the advertising specialties were, and all of the custom
carrying cases are, manufactured to customer order. The Terrapin(TM) products
have, to date, been manufactured for inventory. Products are shipped to
customers by common carrier.
COMPETITION
The business in which the Company engages is highly competitive and
there are competitors which are substantially larger than the Company and have
greater financial and other resources. In the production of carrying cases for
original equipment manufacturers, the Company competes with approximately 1,500
United States and foreign producers. Management believes that the Company
maintains its competitive position through maintenance of an extensive line of
products, design capability, strategic pricing policies, reliable product
delivery and quality.
EMPLOYEES
At September 30, 1998, the Company had approximately 87 full-time
employees, of whom five are employed in executive capacities, 15 are employed
in administrative and clerical capacities, 12 are employed in sales and sales
support capacities and the balance in production and warehouse capacities. The
number of the Company's production and warehouse employees varies from
approximately 50 to 75, depending on seasonal production requirements. From
time to time, use is made of full-time temporary workers (four at September 30,
1998) employed by personnel agencies which provide their services to the
Company. The Company employs approximately 10 quality control inspectors in its
Hong Kong quality control facility. The Company considers its employee
relations to be satisfactory.
ENVIRONMENTAL PROTECTION
Compliance with Federal, state and local laws and regulations
pertaining to the discharge of materials into the environment, or otherwise
relating to the protection of the environment, has not had, and is not
anticipated to have, any material effect upon the capital expenditures,
earnings or competitive position of the Company.
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ITEM 2 - DESCRIPTION OF PROPERTY
The Company, through a subsidiary, leases manufacturing and office
space at 702 South Chapin Street, South Bend, Indiana on a net lease basis
through February 28, 1999 at an annual rental of $204,000 plus real estate
taxes thereon (which aggregated approximately $97,000 during Fiscal 1998 on an
accrual basis). The lease will not be renewed upon expiration. See "Production
and Materials."
These premises have a total floor area of approximately 80,000 square
feet, 70,000 square feet of which have been used for manufacturing and storage,
and the balance of which have been used for offices. The subsidiary also owns
and is currently renovating for office and for warehousing purposes, a building
at 713 Scott Street, South Bend, Indiana, which it purchased in 1990 for
$125,000. The Company's sales, customer service and selected administrative
staff will occupy this space upon termination of its lease at 702 South Chapin
Street, South Bend, Indiana.
The Company considers its properties in Indiana to be suitable and
adequate for its present and contemplated use thereof.
The Company, through a Hong Kong subsidiary, leases warehouse
facilities in Hong Kong (pursuant to a lease running through May 1999) at which
its quality control inspection facilities are also located, at a monthly rental
of approximately $4,700, and through June 30, 1998 it had leased an apartment
in Hong Kong at a monthly rental of approximately $9,000 for one of its
executives living in Hong Kong.
The Company also has several minor leases for offices or public
warehouse space in Copenhagen, Denmark; Sydney, Australia; and, Scotland; on a
monthly basis or as needed.
The Company leases office space for its executive and accounting
offices at 400 Post Avenue, Westbury, New York, at a rental of approximately
$5,200 per month. The five-year lease terminates in June 2003, but is
cancelable without cost to the Company at the end of the third year.
The Company previously owned approximately one acre of land in
Brooklyn, New York on which a two story building containing approximately
45,500 square feet of space is located. The building was originally utilized
for Company operations and then leased to others. The Company had granted a
first mortgage on this property as security for a loan to the Company in the
original principal amount of $1,200,000. On December 4, 1997, the Company
consummated the sale of this property in consideration for $830,000 in cash.
The proceeds from the sale were used to pay down a portion of the Company's
outstanding mortgage obligations with respect to the property, the balance of
which was paid by the Company. The Company paid a brokerage fee of $53,100 in
connection with this transaction.
ITEM 3 - LEGAL PROCEEDINGS
On July 15, 1998, Hollco International Limited ("Hollco"), a former
Asian contractor which manufactured custom carrying cases for the Company,
commenced a claim against the Company in an amount of $140,500 which Hollco
alleges that it is owed for cases which it manufactured under order from the
Company. The Company believes that these charges were offset wholly by product
defects and rejects as well as additional costs incurred by the Company,
including air shipment of product to avoid loss of market share. The Company
had charged Hollco by issuing its invoices for these expenses. The Company has
a counter claim against Hollco for these and other charges, and believes that
the outcome of this matter will not have a material effect on the Company.
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ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 12, 1998 the Company held its Annual Meeting of
Shareholders. The holders of 4,798,141 shares of Common Stock of the Company
were entitled to vote at the meeting and the holders of 4,057,860 shares of
Common Stock, or approximately 85% of shares entitled to vote at the meeting,
were represented by proxy. No shareholders were present in person. The
following actions took place:
1. The holders of 3,998,571 shares of Common Stock voted for the
election of Theodore H. Schiffman to continue to serve as a director of the
Company. The holders of 3,998,571 shares of Common Stock voted for the election
of Michael Schiffman to continue to serve as a director of the Company. The
holders of 4,020,731 shares of Common Stock voted for the election of Samson
Helfgott to continue to serve as a director of the Company. The holders of
4,010,731shares of Common Stock voted for the election of Noah Fleschner to
continue to serve as a director of the Company. No shareholders voted for
anyone other than the nominees.
2. The shareholders ratified the appointment of Patrusky, Mintz &
Semel, as independent accountants of the Company for the fiscal year ending
September 30, 1998. The holders of 4,015,680 shares of Common Stock voted for
the ratification, the holders of 4,180 shares of Common Stock voted against the
ratification and the holders of 38,000 shares of Common Stock abstained from
voting.
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PART II
ITEM 5 - MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market for the Common Stock. The principal market for the Company's
Common Stock is the NASDAQ SmallCap Market. The following table sets forth the
high bid and low bid quotations from the NASDAQ SmallCap Market, for the fiscal
quarters set forth below. These quotations (and those for the Class B Warrants
shown below) represent prices between dealers, do not include retail markup,
markdown or commission and do not necessarily represent actual transactions.
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Common Stock
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Period High Bid Low Bid
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Fiscal 1998
First Quarter $1.840 $0.530
Second Quarter 3.620 2.250
Third Quarter 3.500 2.310
Fourth Quarter 3.000 0.870
Fiscal 1997
First Quarter $5.250 $0.876
Second Quarter 1.562 0.626
Third Quarter 2.126 1.250
Fourth Quarter 2.126 1.062
</TABLE>
On December 23, 1998, the closing bid quotation for the Common Stock
was $.81 per share.
Market for the Class B Warrants. The Company's Class B Warrants have
been traded in the over-the-counter market since September 13, 1995. The
Company's Class A Warrants expired and ceased trading on December 31, 1996. The
following table sets forth the high and low bid prices for the Class B Warrants
as reported by the National Quotation Bureau from the Pink Sheets and the OTC
Bulletin Board for the fiscal quarters set forth below:
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Class B Warrants
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Period High Bid Low Bid
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<S> <C> <C>
Fiscal 1998
First Quarter $1.25 $ .63
Second Quarter - -
Third Quarter 1.00 -
Fourth Quarter .75 .68
Fiscal 1997
First Quarter $3.000 $1.000
Second Quarter 1.516 0.016
Third Quarter 1.250 0.016
Fourth Quarter 1.250 0.063
</TABLE>
The Class B Warrants are thinly traded and were not traded on December
23, 1998. On August 3, 1998 the quotation was $.69.
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Holders of Common Stock. On December 23, 1998, there were
approximately 241 holders of record of the Company's Common Stock.
Holders of Class B Warrants. On December 23, 1998, there were two
holders of record of the Class B Warrants.
Dividends. The Company has not paid any cash dividends since 1987 and
does not plan to pay cash dividends in the foreseeable future. The payment of
dividends will depend upon the Company's outstanding loan arrangements as well
as its short-term and long-term cash availability, working capital, working
capital needs and other factors, as determined by the Company's Board of
Directors. The Company's current credit arrangements preclude the Company from
paying dividends.
Sale of Unregistered Securities. On December 4, 1997 the Company
consummated a private offering (the "1997 Private Placement") of securities
consisting of units ("Units"), each Unit comprised of (i) 30,000 shares of
Common Stock, (ii) one warrant (a "Private Placement Warrant ") to purchase up
to 30,000 shares of Common Stock at $4.00 per share and (iii) one unsecured
convertible promissory note (a "Note") in the principal amount of $10,000,
bearing interest at a rate of 10% per annum (convertible at the sole option of
the Company under certain circumstances, into 20,000 shares of Common Stock and
one Private Placement Warrant) maturing on December 4, 1998. A total of 55.4
Units were sold for $25,000 per unit, aggregating gross proceeds of $1,385,000.
Included in the Units sold was $554,000 aggregate principal amount of debt. A
commission of $169,000 was paid by the Company in connection with such sales.
The sales were made to accredited investors pursuant to Regulation D
promulgated under the Securities Act of 1933, as amended. On December 4, 1998,
the Company exercised its option to convert all of such Notes into a total of
1,108,000 shares of Common Stock and Private Placement Warrants to purchase
1,662,000 shares of Common Stock, and paid interest which had accrued on such
Notes of approximately $72,000. Certain officers and directors of the Company
participated in this transaction; see Item 12, "Certain Relationships and
Related Transactions."
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ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with the
Company's Financial Statements and the notes thereto appearing elsewhere in
this Report as Item 7. This Report contains statements which constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company cautions that forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those in the
forward-looking statements as a result of various factors, including those set
forth under the caption on "Risk Factors".
The following discussion and analysis compares the results of the
Company's continuing operations for the years ended September 30, 1998 (the
"1998 Period"), 1997 (the "1997 Period") and 1996 (the "1996 Period"). The
information and comparative data presented herein reflects the elimination of
the Company's advertising specialties division (the "Advertising Specialties
division").
TWELVE MONTHS ENDED SEPTEMBER 30, 1998 (THE "1998 PERIOD") COMPARED WITH TWELVE
MONTHS ENDED SEPTEMBER 30, 1997 (THE "1997 PERIOD").
The Company's net profit (loss) decreased from a net profit of
$139,400 in the 1997 Period to a loss of $(1,078,800) in the 1998 Period, a
decrease of $1,218,200. The decrease in the 1998 Period was primarily related
to two non-recurring items, a restructuring charge of $897,400 and officers
severance of $350,000, described below. Basic and diluted earnings per share
decreased from a profit of $.04 to a loss of ($.23) in the 1998 Period.
REVENUES
Net sales increased $292,600 (2%) to $13,028,900 in the 1998 Period,
from $12,736,300 in the 1997 Period. Custom case sales increased by $658,900,
which was offset by a decrease of $366,300 from the Company's
Terrapin line. The decrease in retail Terrapin(R) sales is partially the result
of an initial stocking position ordered by one customer during the 1997 Period
which did not reoccur in the 1998 Period, however generally the sales of
Terrapin have not met expectations. The Company is currently evaluating
business strategies for its computer case product line. Higher custom case
sales reflect increased demand primarily from two of the Company's major
customers, as well as selected new accounts.
OPERATING INCOME
Consolidated income (loss) from continuing operations before tax
decreased by $2,266,200 to a loss of ($1,262,700) in the 1998 Period from a
profit of $1,003,500 in the 1997 Period. The decrease relates, in part, to two
non-recurring charges to operations; the first, for $897,400 relates to
restructuring charges associated with the shutdown of the Company's factory in
South Bend, Indiana, and the second, for $350,000 for severance amounts payable
to the Company's Chief Executive Officer.
In addition, gross profit decreased $688,400 to $3,707,600 in the 1998
Period from $4,396,000 in the 1997 Period. The gross profit percent decreased
from 34.5% in the 1997 Period to 28.5% in the 1998 Period. The decrease is
attributable primarily to the Company's Terrapin(R) line where competitive
costs of retail selling, as well as selected inventory reserves caused a
decrease in gross profit of $409,000. The custom case line gross profit
deceased $279,400 as a result of certain inventory reserves in the 1998 Period
and due to certain high margin orders received in Fiscal 1997.
Selling expenses increased by $68,300 (5%) from $1,371,400 in the 1997
Period to $1,439,700 in the 1998 Period. The ratio of selling expenses to net
sales was 11% in both the 1998 and 1997 Period. The increase in selling
expenses in the 1998 Period was primarily the result of an increase in
commissions.
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General and administrative expenses, increased as a percentage of net
sales, from 16% in the 1997 Period to 17% in the 1998 Period, while the amount,
increased $268,800 (14%) to $2,253,400 in the 1998 Period from $1,984,600 in
the 1997 Period. The increase in general and administrative expenses is
attributable, in part, to the accounting treatment related to the sale of the
business which represented discontinued operations. This business was sold
effective September 30, 1997. For accounting purposes, a portion of certain of
the 1997 Period salaries, professional fees, telephone and other related
administrative expenses were allocated to this business and included in the
discontinued operations, not in general and administrative expenses. Upon the
divestment of this business line, the remaining business absorbed all of such
costs as general and administrative expenses. As a result, the 1998 Period
numbers appear to increase substantially. In addition, there were increases in
travel ($42,000) relating to overseas business, and professional fees ($77,000)
in part due to employment contracts, potential acquisitions, and the MedCovers
Inc. production contract.
Restructuring charges of $897,400 were incurred in the 1998 Period
relating to the shutdown of the Company's South Bend, Indiana production
facility. The majority of the Company's products are manufactured overseas and
the plant was operating at substantially below its capacity.
Severance expense to a co-founder of the Company was recorded in the
amount of $350,000 in the 1998 Fiscal Period; no comparable amount was included
in the 1997 Fiscal Period.
OTHER INCOME
Total interest expenses increased by $102,500 (51%) to $302,400 in the
1998 Period from $199,900 in the 1997 Period due to interest associated with
the indebtedness issued in connection with the Company's 1997 Private
Placement, and, due to the amortization of deferred debt costs incurred in
connection with both the 1997 Private Placement and the Company's new bank
credit line which are included in interest expense.
The Company's rental building in Brooklyn, New York was not leased
during the 1997 Period or rented in the 1998 Period. Rental income - net
decreased to a loss of $60,700 in the 1998 Period from a loss of $106,200 in
the 1997 Period. This property was sold in December 1997. [See discussion
below.]
Interest and other income - net increased $835,800 in the 1998 Period
from the 1997 Period resulting primarily from the sale of property described
above. The Company recorded a pretax gain on this sale of approximately
$669,000.
INCOME TAXES
The Company incurred a loss before income taxes in Fiscal 1998 and
should have recorded an income tax credit. Due to the effects of temporary
and permanent differences, the Company had taxable income before net operating
loss carryforwards.
The provision for income taxes increased by $35,600. Current income
taxes increased by $12,300. The Company accrued current taxes of $18,700
which represented federal alternative tax and state and local taxes. In Fiscal
1997, current taxes amounted to $6,400.
Deferred income taxes increased $23,300. Deferred income taxes
decreased by $456,300 as a result of applying the balance sheet approach of
calculating deferred tax assets. The Company increased its valuation allowance
by $479,600 as it is uncertain if certain deferred tax assets will be fully
utilized.
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TWELVE MONTHS ENDED SEPTEMBER 30, 1997 (THE "1997 PERIOD") COMPARED WITH TWELVE
MONTHS ENDED SEPTEMBER 30, 1996 (THE "1996 PERIOD")
The profit in the 1997 Period of $139,400 is a significant improvement
from the ($1,183,600) loss in the 1996 Period. Earnings per share increased
from a loss of ($.54) in the 1996 Period to a profit of $.04 in the 1997
Period.
REVENUES
Net sales decreased $1,943,400 (13%) to $12,736,300 in the 1997
Period, from $14,679,800 in the 1996 Period. The Company's retail Terrapin(R)
line accounted for a decrease of $220,800 and the remainder reflects lower
custom case sales because of declined volume with three large customers.
OPERATING INCOME
Consolidated income from continuing operations increased by $2,320,400
to a profit of $1,003,500 in the 1997 Period, up significantly from a
($1,226,900) loss in the 1996 Period.
Although net sales decreased in the 1997 Period, gross profits and
margin increased significantly. Gross profit increased $1,603,600 (57%) to
$4,396,000 in the 1997 Period up from $2,792,400 in the 1996 Period. The gross
margin improved 15.5 percentage points to 34.5% in the 1997 Period up from
19.0% in the 1996 Period. These operating improvements reflect the cumulative
impact of numerous management programs focused on increasing manufacturing
efficiencies, raising quality standards and eliminating unprofitable product
offerings.
Distribution expenses decreased $46,900 (56%) from $83,400 in the 1996
Period to $36,500 in the 1997 Period and from .6% of net sales in the 1996
Period to .3% in the 1997 Period, primarily as a result of better control of
import shipping expenses.
Selling expenses decreased $649,100 (32%) from $2,020,500 in the 1996
Period to $1,371,400 in the 1997 Period. In the 1997 Period, the ratio of
selling expenses to net sales was 11% down from 14% in the 1996 Period. The
decrease in selling expenses in the 1997 Period was primarily the result of a
42.5% decrease in sales salaries and commissions reflecting a curtailed level
of sales staffing coupled with lower sales volume, and lower travel and
advertising expenses, all partially offset by increased samples expenditures
and trade show expenses.
General and administrative expenses increased as a percent of net
sales from 13% in the 1996 Period to 15.6% in the 1997 Period, while the amount
increased by $69,246 (3.6%) to $1,984,566 in the 1997 Period from $1,915,320 in
the 1996 Period. The increase in general and administrative expenses consisted
primarily of increases in salaries, reflecting key management additions, higher
Hong Kong operational expenses, and increased travel related to cost
containment efforts, all partially offset by lower group insurance cost, costs
associated with the opening of letters of credit for overseas sourcing of
carrying cases, and employment fees coupled with workmen's compensation and
group health insurance refunds (total refunds of $87,842).
OTHER INCOME (DEDUCTIONS)
Total interest expenses decreased by $29,742 (13.0%) to $199,915 in
the 1997 Period from $229,657 in the 1996 Period due to lower borrowing levels
reflecting repayments of debt.
The Company's rental building in Brooklyn, New York, was partially
leased during both the 1997 and 1996 Periods. Rental income - net increased
from a loss of ($113,968) in the 1996 Period to a loss of ($170,461) in the
1997 Period as a result of lower rental receipts.
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Other income - net decreased $149,838 in the 1997 Period from the 1996
Period resulting primarily from the write-off of a receivable on the sale of
fixed assets ($30,000) and the closing of a sales office ($129,245).
Income from continuing operations increased significantly to a
$362,160 profit in the 1997 Period, up $1,214,846 from a ($852,686) loss in the
1996 Period.
DISCONTINUED OPERATIONS
On September 30, 1997, the Company sold its Advertising Specialties
division. These discontinued operations showed a operating loss of ($547,055)
in the 1997 period partially offset by a $324,329 gain on the sale of those
operations, compared with a ($330,877) operating loss related to those
operations in the 1996 Period.
INCOME TAXES
The effective tax rate for both continued and discontinued operations
in the 1997 Period was 41.9% compared to 40.7% rate in the 1996 Period. The
differential in rates occurred primarily due to the balance sheet approach used
to calculate deferred income taxes for the 1996 Period.
LIQUIDITY AND CAPITAL RESOURCES
In the 1998 Period, $962,300 of cash was used by operating activities.
This decrease in operating cash resulted primarily from a net loss in the 1998
Period of ($1,078,800); a decrease in accounts payable $721,300; an increase in
inventories $148,700; and an increase in prepaid and other assets $182,100. An
increase of accrued expenses and other accrued liabilities of $1,081,770 were
the primary offsets to cash used by operations.
Net investing activities in the 1998 Period provided cash of
$1,485,500. The Company collected $768,200 of notes receivable, which arose
from the sale of its discontinued operations in 1997 and collected $53,100 of
loans made to its officers. It also collected $824,400 from the sale of its
rental building and from the sale of other assets to MedCovers. In the 1998
Period, the Company purchased $160,200 of property, plant and equipment.
Financing activities in the 1998 Period used cash of $1,166,800. As a
result of the Company's private placement, the Company received $292,500 for
the issuance of common stock and $10,000 for the issuance of convertible notes
payable. The Company also received $121,500 for the exercise of 75,000 stock
options from the former president of the Company. The Company incurred offering
costs of $27,800 and debt costs of $93,500. Funds were used for payments of
short-term borrowing of $131,000, long-term notes payable of $234,700, note
payments to a related party of $46,000 and for the mortgage of $1,057,700.
The Company's registration statement on Form SB-2 filed with the
Securities and Exchange Commission for the registration of 1,450,000 shares of
its Common Stock issuable upon exercise of certain outstanding warrants was
declared effective by the Commission on March 25, 1996. As of September 30,
1998, there remained outstanding warrants exercisable for 219,000 shares at
$.50 (the exercise price of these Warrants had been reduced from $5.00) per
share, which were scheduled to expire December 31, 1998, and warrants
exercisable for 87,500 shares at $2.00 per share which were scheduled to expire
January 31, 1999. The Company's Common Stock is traded on the Nasdaq SmallCap
Market and, during the first days immediately preceding December 23, 1998 was
trading in the range of approximately $1.00 per share. The Company anticipates
that holders of its remaining outstanding warrants will continue to exercise
such warrants only if the Common Stock trades at a substantial premium over the
exercise price of the warrants, of which there can be no assurance.
During Fiscal 1997 and in December 1997, the Company consummated the
1997 Private Placement of Units. Each Unit was comprised of (i) 30,000 shares
of Common Stock, (ii) one Private Placement Warrant to purchase up to 30,000
shares of Common Stock at $4.00 per share and (iii) one unsecured convertible
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promissory note. The "Note" in the principal amount of $10,000, bearing
interest at a rate of 10% per annum (convertible at the sole option of the
Company under certain circumstances, into 20,000 shares of Common Stock and one
Private Placement Warrant) maturing on December 4, 1998. A total of 55.4 Units
were sold for $25,000 per unit, aggregating gross proceeds of $1,385,000.
Included in the Units sold was $554,000 aggregate principal amount of debt. A
commission in the amount of $169,000 was paid by the Company in connection with
such sales. The sales were made to accredited investors pursuant to Regulation
D promulgated under the Securities Act of 1933, as amended. On December 4,
1998, the Company exercised its option to convert $554,000 of debt into
1,108,000 shares of Common Stock and warrants to purchase 1,662,000 shares of
Common Stock, and paid accumulated interest on the Notes of approximately
$72,000. Certain officers and directors participated in this transaction; See
Item 12, "Certain Relationships and Related Transactions."
Forward and Koszegi Industries, Inc., a wholly-owned subsidiary of
Forward ("Koszegi"), established a new line of credit with a bank during 1998
and are indebted to such bank for short-term borrowings and letters of credit.
The total line is for $4,500,000. The line of credit is scheduled to mature on
March 31, 2001. Borrowing availability is determined based on a formula of
accounts receivable and inventory. The interest rate on the line is the prime
rate in effect from time to time plus three quarters of one percent. The
Company secured this line of credit with all of its assets and those of
Koszegi. An additional $500,000 is available to finance equipment. The Company
used the new credit availability to pay its outstanding indebtedness on its
former credit line of $937,000. The former credit line had a maximum
availability of $1,100,000 of which $750,000 was reserved for letters of credit
(acceptances). In addition, the Company also used the facility to repay
outstanding letters of credit financed by a third party. The new facility
contains certain financial covenants for which the Company was not in
compliance. The bank has waived such covenants. Amounts owed the bank at
September 30, 1998 were $1,244,000. There remained approximately $850,000
of additional availability.
In December 1997, the Company sold its building in Brooklyn, New York
for $830,000 and recognized a gain of approximately $669,000. The proceeds of
the sale were used to pay down the balance of the mortgage.
In September 1998, the Company commenced a plan which it believes will
streamline its operations and reduce its cost structure over time. As a result
of increasing cost competitiveness of Asian contract-manufacturers, most of the
Company's goods are now manufactured overseas. This caused the Company's South
Bend, Indiana facility to operate at significantly less than its capacity. The
Company announced a plan of restructuring, in September 1998, pursuant to which
it will close its manufacturing operations by February 28, 1999, but continue
to provide domestic manufacturing through a contractual arrangement with
MedCovers, Inc., of Raleigh, North Carolina. Under the agreement, the Company
sold to MedCovers certain key production equipment, will provide technical
support, and maintain quality assurance personnel at MedCovers factory. The
Company, upon the closing of its factory, will incur cash expenditures of
approximately $575,000 over a period of months which it expects to pay from its
internally generated operating funds. The primary component of this cost will
be severance and employee related benefits, totaling approximately $360,000.
The severance portion of this amount will be paid to employees over the period
for which each employee will receive severance, through normal payroll
processing. The period of payment ranges up to three months for some employees,
dependent on the period of time such individuals have been with the Company.
In addition, the Company commenced renovating a building which it
owns, adjacent to its leased factory in South Bend, to house its remaining
sales staff, customer support and other administrative personnel who remain in
Indiana. The renovation, which is expected to be completed about the end of
February 1999, is expected to cost approximately $80,000 and will be paid from
the Company's existing funds.
The Company, like many others which own computer software, has been
required to address the issue of software applications which are unable to
recognize `OO' in their program code. The Company has been evaluating
alternatives to resolve this problem and concluded that acquiring a new data
system, rather than upgrading its existing systems and applications, was of
greater long-term value. The Company has committed approximately $125,000
during the first two quarters of fiscal 1999,encompassing the cost of
installing new hardware and software. Such amounts are to be paid from existing
cash. Hardware was installed during December 1998. The Company expects to
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incur internal staff costs associated with training. Cost of staff time
will be expensed as incurred, while cost of the new system will be
capitalized and amortized over its useful life.
In connection with its restructuring, the Company hired a new Chief
Executive Officer and received the resignation of Mr. Theodore H. Schiffman,
its co-founder and former Chief Executive Officer. Mr. Schiffman received a
five-year consulting arrangement with annual consulting payments of $200,000
per year, effective December 11, 1998, and a severance package totaling
$350,000, of which $200,000 is payable on January 1, 1999 and $150,000 is
payable on the 15th month anniversary thereof. Such amounts will be paid out of
the Company's existing cash position or from internally generated funds.
The Company did not incur any other long-term debt in the 1998
Period. At September 30, 1998, long-term debt was $42,700 and all installment
note and capital lease payments were made on a timely basis. Long- term debt
is scheduled to be paid in Fiscal 1999.
DEFERRED INCOME TAXES
The Company's balance sheet at September 30, 1998 includes $1,749,000
of deferred income taxes as an asset. The Company was profitable in 1998, before
restructuring charges associated with the non-recurring costs of the shutdown
of its South Bend plant, and in the 1997 Period. However, to the extent that
the Company's operations may not be profitable in future periods, the Company
would not be able to realize the benefit of its deferred tax assets. Without
such deferred tax assets, at September 30, 1998, the Company's stockholder's
equity at such date of $3,461,200 would have been reduced by $1,749,000 to a
stockholder's equity of $1,712,100 and the Company's working capital at
September 30, 1998 would have been reduced by $246,600 from $1,085,500 to
$838,900. On December 4, 1998, the Company exercised its option to convert
$554,000 of debt to equity (and warrants) which would have increased the
tangible net worth at September 30, 1998, to $2,266,100.
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RISK FACTORS
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
All cautionary statements made in this Annual Report on Form 10-KSB
should be read as being applicable to all related forward-looking statements
wherever they appear. Investors should consider the following risk factors as
well as the risks described elsewhere in this Annual Report on Form 10-KSB.
INADEQUACY OF CASH FLOW FROM OPERATIONS; ADDITIONAL FINANCING REQUIREMENTS
The Company's cash commitments for the 12 month period commencing
October 1, 1998 include aggregate minimum base compensation of approximately
$773,600 to all officers of the Company and minimum rent of approximately
$186,100 (aggregating approximately $959,700). The Company also incurs overhead
and other costs such as salaries, related benefits, office expenses,
professional fees and similar expenses. For the Company's fiscal year ended
September 30, 1998, selling, general and administrative expenses, which
includes compensation and rent as described above and other amounts, totaled
$3,693,000. The Company also expends funds on the production and development of
projects. At September 30, 1998, the Company had cash and cash equivalents of
$704,000 and accounts receivable of $2,907,000. The Company also has a bank
credit line which provides up to $4.5 million in borrowing but is subject to
limitations based on a formula of receivables and inventory. If the Company
expends additional funds on development and production of projects in excess of
its current resources and future cash receipts, the Company will be required to
reduce its expenses to a level below its revenues, raise additional capital
and/or borrow funds to sustain its operations. If other external sources of
funds are not available to the Company and future cash revenues are not
sufficient to meet the Company's cash needs, the Company may consider reduction
of the compensation or number of personnel and the number of development
projects that it will fund. The Company has not made any specific plans or
entered into any agreements to reduce the level of its expenditures in the
event that such reductions become necessary. There is no assurance that the
Company will be able to obtain additional financing, on favorable terms, or at
all, when needed. Failure to obtain such financing could have a material
adverse effect on the Company.
Any expansion of the Company's operations will require additional
financing through borrowing and/or the sale of additional securities. There is
no assurance that additional financing will be available or, if available, that
the terms thereof will not be unduly burdensome on the Company.
POSSIBLE INABILITY TO REALIZE BENEFIT OF DEFERRED INCOME TAX ASSETS.
The Company's balance sheet at September 30, 1998 includes deferred
tax assets aggregating $1,749,000 or approximately 22% of the Company's total
assets, of which $246,600 is classified as current. To the extent that the
Company's operations are not profitable, the Company would not be able to
realize the benefit of its deferred tax assets. Without such deferred tax
assets, at September 30, 1998, the Company's shareholders' equity at such date
of $3,461,200 would have been reduced by $1,749,000 to a shareholders' equity of
$1,712,100 and, after giving effect to the conversion of $554,000 of debt to
equity on December 4, 1998, $2,266,100.
The Company's belief that its deferred tax assets will be realized is
based upon a number of factors. The Company has been in business for over 35
years. Although the Company sustained a loss from continuing operations during
Fiscal 1996 and Fiscal 1995, the Company had net income in Fiscal 1997 and
Fiscal 1998 (before non-recurring adjustments for the shutdown of its South
Bend plant and severance to an officer). The loss in Fiscal 1995 was primarily
a result of discontinued operations, expenses incurred in the launch of the
Company's new Terrapin? line of computer carrying cases and overseas quality
control problems, which quality control problems have been largely resolved.
The Company has continued to streamline its fixed operating costs during 1998
through the sale of a building and shutdown of its production facility. Given
the significance of the Company's deferred tax assets, the failure of the
Company to realize the benefit of its deferred tax assets would have a material
adverse effect on the Company's working capital and net worth.
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DEPENDENCE ON FOREIGN MANUFACTURERS.
During Fiscal 1997, approximately 63% of the Company's carrying cases
were manufactured overseas (primarily in Asia) by various contractors. During
Fiscal 1998, the number of the Company's carrying cases manufactured overseas
increased to approximately 78%. The Company does not have any written
agreements with any of such contractors to continue to supply the Company with
finished product. In order to maintain competitive pricing, it is anticipated
that the use of overseas contractors will maintain its current level or
increase. Any interruption in this source of supply would have a material
adverse effect on the Company. Utilizing foreign sources of supply requires
additional advanced planning and control and more rapid payment for
merchandise, and such sources are subject to special risks such as potential
political instability, unanticipated trade restrictions, war and shipping
delays.
DEPENDENCE ON SIGNIFICANT CUSTOMERS.
The Company currently has several customers for its carrying cases
that each account for a significant percentage of the Company's business. For
Fiscal 1998, two of the Company's customers, together with their international
affiliates, accounted for approximately 39% and 16%, respectively, of the
Company's sales. In Fiscal 1997, two customers accounted for approximately 28%
and 21%, respectively, of the Company's sales. The loss of either of these
customers (whether as a result of such customer purchasing its requirements
from another manufacturer, deciding to manufacture its own carrying cases or
eliminating the inclusion of carrying cases with its product) could have a
material adverse effect on the Company.
CONCENTRATION OF CREDIT RISK.
While the Company has not experienced significant losses in extending
credit to customers, at September 30, 1998, three customers and their
international affiliates accounted for approximately 67% of the Company's
accounts receivable and at September 30, 1997, three customers accounted for
approximately 46% of the Company's accounts receivable. The failure of any of
such customers to pay the Company such amounts when and as due would have a
material adverse effect on the Company.
INTENSE COMPETITION AND EASE OF ENTRY.
There is intense competition in the sale of carrying cases and
advertising specialties. Since no significant proprietary technology is
involved in the production of the Company's products, others may enter the
business with relative ease to compete with the Company.
RELIANCE ON KEY PERSONNEL.
The Company is highly dependent on the personal efforts and services
of Jerome E. Ball, Vice Chairman and Chief Executive Officer, Michael
Schiffman, President, and Theodore H. Schiffman, Chairman. The Company has
employment agreements with Jerome E. Ball for a term expiring September 30,
2000, a consulting agreement with Theodore H. Schiffman for a term expiring in
2003, and with Michael Schiffman for a term expiring September 30, 2001. The
business of the Company would be materially and adversely affected if the
Company lost the services of any of such individuals. The Company does not have
key person life insurance as to any of such individuals.
ABSENCE OF CASH DIVIDENDS.
The Company has not paid any cash dividends in more than ten years.
The payment of future cash dividends by the Company, if any, will depend upon
the Company's short-term and long-term cash availability, working capital,
working capital needs and other factors, as determined by the Company's Board.
The Company is restricted from paying dividends under its new credit facility.
The Company does not anticipate that cash dividends will be paid in the
foreseeable future.
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CONTROL BY INSIDERS.
Members of the Board, including the Company's Chief Executive Officer,
Chairman and President, together with its Chief Financial Officer and
Secretary, directly or indirectly, beneficially own 1,974,907 shares of Common
Stock, aggregating approximately 29.3% of the issued and outstanding capital
stock of the Company. By virtue of their ownership of such Common Stock, such
executive officers and directors or their affiliates may, collectively, be
deemed to control the Company through the exercise of sufficient voting power
to effectively control (or, at least, exercise a significant influence upon)
the election of the Company's Board, direct the appointment of the Company's
officers and, in general, significantly influence the outcome of any corporate
transaction or other matter submitted to the Company's shareholders for
approval, including mergers, consolidations and the sale of all or
substantially all of the Company's assets, and to prevent or cause a change in
control of the Company.
EFFECT OF OUTSTANDING OPTIONS, WARRANTS AND OTHER CONVERTIBLE SECURITIES.
For the respective terms of outstanding options, warrants and other
convertible securities granted by the Company, the holders thereof are given an
opportunity to profit from a rise in the market price of the Company's Common
Stock. As of December 23, 1998, 4,680,500 shares of Common Stock (or an
additional 79% of the outstanding Common Stock) are issuable upon the exercise
or conversion of such securities at prices ranging from $0.50 to $4.00 per
share. In November 1996, the Company's Board adopted, and in August 1997, the
Company's shareholders approved, the Company's 1996 Stock Incentive Plan (the
"Plan"), pursuant to which up to 8,000,000 shares of Common Stock may be issued
to officers and employees of the Company upon the exercise of incentive stock
options and nonqualified stock options. Options to purchase up to 1,050,000
shares of Common Stock, included in the figure above, have been granted under
such Plan as of December 23, 1998 . The terms on which the Company may obtain
additional financing during the respective terms of these stock options,
warrants and other convertible securities may be adversely affected by their
existence. The holders of such stock options and warrants may exercise such
securities at a time when the Company might be able to obtain additional
capital through a new offering of securities or other form of financing on
terms more favorable than those provided by such stock options and warrants.
POTENTIAL ANTI-TAKEOVER MEASURES.
The Company is authorized to issue up to 4,000,000 shares of "blank
check" preferred stock. The Board has the authority, without shareholder
approval, to issue preferred stock in one or more series and to fix the
relative rights and preferences thereof including their redemption, dividend
and conversion rights. The ability of the Company to issue the authorized but
unissued shares of preferred stock could be utilized to impede potential
take-overs of the Company.
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RISKS OF LOW-PRICED STOCKS.
The Commission has adopted regulations which define a "penny stock" to
be any equity security that has a market price (as therein defined) of less
than $5.00 per share or an exercise price of less than $5.00 per share, subject
to certain exceptions. For any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to any transaction in a penny
stock, of a disclosure schedule prepared by the Commission relating to the
penny stock market. Disclosure is also required to be made about commissions
payable to both the broker-dealer and the registered representative and current
quotations for the securities. Finally, monthly statements are required to be
sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks. The foregoing
penny stock restrictions will not apply to the Company's securities if such
securities continue to be listed on the Nasdaq SmallCap Market, as to which
there can be no assurance, and have certain price and volume information
provided on a current and continuing basis or meet certain minimum net tangible
assets or average revenue criteria. In any event, even if the Company's
securities were exempt from such restrictions, it would remain subject to
Section 15(b)(6) of the Exchange Act, which gives the Commission the authority
to prohibit any person engaged in unlawful conduct while participating in a
distribution of penny stock from associating with a broker-dealer or
participating in a distribution of penny stock, if the Commission finds that
such a restriction would be in the public interest. If the Company's securities
were to be removed from listing on the Nasdaq SmallCap Market or otherwise
become subject to the existing rules on penny stocks, the market liquidity for
the Company's securities could be severely adversely affected.
RISK OF LOSS OF LISTED STATUS OF COMMON STOCK ON THE NASDAQ SMALLCAP MARKET.
The National Association of Securities Dealers listing requirements
require, among other things, that all issuers of securities listed on the
Nasdaq SmallCap Market maintain a continued minimum bid price per share of such
securities of $1.00. The per share price of the Company's Common Stock as of
December 23, 1998 was $0.81. There can be no assurances that the per share
price of the Company's Common Stock will rise above $1.00 within the designated
time-frame, or that such price can be maintained. A consequence of the failure
to maintain a bid price per share of $1.00 may be the de-listing of the Common
Stock from the Nasdaq SmallCap Market, which may have a material adverse effect
on the market value of the Common Stock and on the ability of the Company to
obtain additional financing.
The Company received a letter from the staff of The Nasdaq Stock
Market dated December 8, 1998, notifying the Company that its shares of Common
Stock have failed to maintain a closing bid price greater than or equal to
$1.00 for the last 30 consecutive trade dates and, pursuant to Nasdaq
Marketplace Rules, will be subject to de-listing in March 1999 if the Company
cannot demonstrate compliance with the $1.00 minimum bid price requirement. The
Company is currently considering several options to increase its stock price,
including a reverse split of its Common Stock. There can be no assurance,
however, that the Company will be able to increase its share price within the
designated time frame, which could, in effect, result in the de-listing of the
Common Stock from the Nasdaq SmallCap Market.
FUTURE SALES OF COMMON STOCK.
Of the 5,906,141 shares of Common Stock currently outstanding,
approximately 41% of such shares are "restricted stock" as that term is defined
under Rule 144 promulgated under the Securities Act and under certain
circumstances may be sold without registration pursuant to such rule. The
Company is unable to predict the effect that sales made under Rule 144, or
otherwise, may have on the then prevailing market price of the Company's
securities although any future sales of substantial amounts of securities
pursuant to Rule 144 could adversely affect prevailing market prices.
HONG KONG - TRANSFER OF SOVEREIGNTY.
A portion of the operations of the Company are currently located in
Hong Kong. As a result, the Company's business, results of operations and
financial condition may be influenced by the political situation in Hong Kong
and by the general state of the Hong Kong economy. On July 1, 1997, sovereignty
over Hong Kong transferred from the United Kingdom to the People's Republic of
China, and Hong Kong became a Special Administrative Region of China (an
"SAR"). As provided in the Sino-British Joint Declaration on the Question of
Hong Kong and the Basic Law of the Hong Kong SAR of China (the "Basic Law"),
the Hong Kong SAR will have a high degree of autonomy except in foreign and
defense affairs. Under the Basic Law, the Hong Kong SAR is to have its own
legislature, legal and judicial system and full economic autonomy for 50 years.
However, there can be no assurance that the transfer of sovereignty and changes
in political or other conditions will not result in an adverse impact on the
Company's business, results of operations or financial condition.
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ITEM 7 - FINANCIAL STATEMENTS
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
REPORT ON
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED SEPTEMBER 30, 1998
CONTENTS
PAGE
----
INDEPENDENT AUDITORS' REPORT ................................... F-2
CONSOLIDATED BALANCE SHEETS...................................... F-3 - F-4
CONSOLIDATED STATEMENTS OF OPERATIONS............................ F-5
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY....................................... F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS............................ F-7 - F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS....................... F-9 - F-24
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS.................. F-25
EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE.............. F-26 - F-28
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
FORWARD INDUSTRIES, INC.
WESTBURY, NEW YORK
We have audited the accompanying consolidated balance sheet of Forward
Industries, Inc. and Subsidiaries as of September 30, 1998, and the related
consolidated statements of operations, changes in stockholders' equity, and
cash flows for the years ended September 30, 1998 and 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Forward Industries, Inc. and Subsidiaries as of September 30, 1998, and the
results of their operations and their cash flows for the years ended September
30, 1998 and 1997 in conformity with generally accepted accounting principles.
We have audited Schedule II and Exhibit 11 of the Company for the year
ended September 30, 1998 and 1997 included in the 1998 annual report of the
Company on Form 10-KSB. In our opinion, the schedule presents fairly the
information required to be set forth therein.
/s/ Patrusky, Mintz & Semel
---------------------------
PATRUSKY, MINTZ & SEMEL
CERTIFIED PUBLIC ACCOUNTANTS
NEW YORK, NEW YORK
December 16, 1998
F-2
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
ASSETS
(NOTE 8)
CURRENT ASSETS:
<S> <C>
Cash and cash equivalents $ 703,920
Accounts receivable, less allowance for doubtful
accounts of $110,800 2,906,843
Inventories (Note 3) 1,083,662
Notes receivable - current portion (Note 4) 350,822
Notes and loans receivable - officers - current
portion (Note 6) 32,311
Prepaid expenses and other current assets (Note 7) 343,536
Deferred income taxes (Note 11) 246,632
-------
Total current assets 5,667,726
---------
PROPERTY, PLANT AND EQUIPMENT - net (Note 5) 187,454
-------
OTHER ASSETS:
Deferred income taxes (Note 11) 1,502,395
Note receivable - net of current portion (Note 4) 345,766
Property and equipment held for sale (Note 2) 154,200
Deferred debt costs 85,161
Notes and loans receivable - officers - net of
current portion (Note 6) 83,962
Other assets 59,412
------
Total other assets 2,230,896
---------
$8,086,076
==========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-3
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(CONTINUED)
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C>
Borrowings under credit line - bank (Note 8) $1,244,103
Accounts payable 1,215,572
Convertible notes payable (converted
into common stock on December 4, 1998) (Note 8) 554,000
Note payable- related party (Note 14) 42,670
Accrued expenses and other current liabilities (Note 10) 1,218,574
Accrued severance to officer 350,000
-------
Total current liabilities 4,624,919
---------
COMMITMENTS (Note 12)
STOCKHOLDERS' EQUITY:
Preferred stock, 4,000,000 authorized shares,
par value $.01; none issued -
Common stock, 40,000,000 authorized shares,
par value $.01; issued 4,963,031 shares
(including 164,890 held in treasury) (Note 15) 49,630
Paid-in capital 6,551,703
Accumulated deficit (2,884,346)
Foreign currency adjustment (17,717)
-------
3,699,270
Less: Cost of shares in treasury 238,113
-------
Total stockholders' equity 3,461,157
---------
$8,086,076
==========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-4
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1998 1997
---- ----
<S> <C> <C>
NET SALES $13,028,888 $12,736,329
COST OF GOODS SOLD 9,321,337 8,340,370
--------- ---------
GROSS PROFIT 3,707,551 4,395,959
--------- ---------
OPERATING EXPENSES:
Distribution 29,716 36,503
Selling 1,439,734 1,371,403
General and administrative 2,253,370 1,984,566
Restructuring charge (Note 2) 897,383 -
Severance to officer (Note 12) 350,000 -
------- ---------
4,970,203 3,392,472
--------- ---------
INCOME (LOSS) FROM OPERATIONS (1,262,652) 1,003,487
--------- ---------
OTHER INCOME (DEDUCTIONS):
Interest expense (279,825) (142,525)
Interest expense - related parties (22,529) (57,390)
Interest income 54,922 42,009
Rental income - net (60,730) (170,461)
Other income (deductions) - net (Note 9) 772,186 (68,407)
------- ------
464,024 (396,774)
------- -------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES (798,628) 606,713
PROVISION FOR INCOME TAXES (Note 11) 280,148 244,553
------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS (1,078,776) 362,160
--------- -------
DISCONTINUED OPERATIONS (Note 13):
Loss from discontinued operations, net of income tax
benefits of $-0- and $(353,489) - (547,055)
Gain on disposal of discontinued operations, net of
income taxes of $-0- and $209,571 - 324,329
-------
- (222,726)
----------- -------
NET INCOME (LOSS) $(1,078,776) $139,434
=========== ========
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE (Note 18):
Basic:
Income (loss) from continuing operations $(.23) $.11
Discontinued operations - (.07)
----- ----
$(.23) $.04
===== ====
Diluted:
Income (loss) from continuing operations $(.23) $.11
Discontinued operations - (.07)
----- ----
$(.23) $.04
===== ====
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING (Note 18)
BASIC 4,650,641 3,314,295
========= =========
DILUTED 4,650,641 3,501,840
========= =========
DIVIDENDS NONE NONE
==== ====
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-5
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
------------ --------------
RETAINED
EARNINGS FOREIGN
NUMBER PAID-IN (ACCUM. CURRENCY NUMBER
TOTAL OF SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENT OF SHARES AMOUNT
----- --------- ------ ------- -------- ---------- --------- ------
YEAR ENDED SEPTEMBER 30, 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE -
October 1, 1996 $3,546,860 3,026,031 $30,260 $5,699,717 $(1,945,004) $ - (164,890) $(238,113)
Common stock issued in
connection with private
placement (Note 15) 538,500 1,077,000 10,770 527,730 - - - -
Deferred offering costs (123,100) - - (123,100) - - - -
Exercise of warrants 2,000 100,000 1,000 1,000 - - - -
Conversion of debt
into equity 100,000 100,000 1,000 99,00 - - - -
Issuance of warrants for
services rendered (Note 15) 25,000 - - 25,000 - - - -
Net income 139,434 - - - 139,434 - - -
---------- --------- ------- ---------- ----------- ------ -------- ---------
BALANCE -
September 30, 1997 $4,228,694 4,303,031 $43,030 $6,229,347 $(1,805,570) $ - (164,890) $(238,113)
========== ========= ======= ========== =========== ====== ======== =========
YEAR ENDED SEPTEMBER 30, 1998
BALANCE -
October 1, 1997 $4,228,694 4,303,031 $43,030 $6,229,347 $(1,805,570) $ - (164,890) $(238,113)
Common stock issued in
connection with private
placement (Note 15) 292,500 585,000 5,850 286,650 - - - -
Deferred offering costs (94,774) - - (94,774) - - - -
Exercise of options 121,500 75,000 750 120,750 - - - -
Issuance of warrants for
services rendered (Note 15) 9,730 - - 9,730 - - - -
Foreign currency
translation adjustment (17,717) - - - - (17,717) - -
Net loss (1,078,776) - - - (1,078,776) - - -
---------- --------- ------- ---------- ----------- -------- -------- ---------
BALANCE -
September 30, 1998 $3,461,157 4,963,031 $49,630 $6,551,703 $(2,884,346) $(17,717) (164,890) $(238,113)
========== ========= ======= ========== =========== ======== ======== =========
</TABLE>
Note - Preferred stock is not shown as no shares have been issued.
The accompanying notes are an integral part
of the consolidated financial statements.
F-6
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $(1,078,776) $139,434
Adjustments to reconcile net income (loss) to net
cash provided by (used in) continuing operations:
Gain on sale of property and equipment (668,962) -
Depreciation and amortization 247,733 182,110
Deferred taxes 261,448 94,234
Reduction of property and equipment to net realizable value 202,096 -
Non-cash compensation 9,730 25,000
Loss from discontinued operations - 547,055
Gain on sale of division - gross - (533,900)
Abandonment of leasehold improvements - 93,812
Changes in assets and liabilities:
Accounts receivable (18,250) (113,933)
Inventories (148,650) 318,327
Prepaid expenses and other current assets (182,134) (55,784)
Other assets 52,836 (58,435)
Accounts payable (721,327) 368,798
Accrued severance to officer 350,000 -
Accrued expenses and other current liabilities 731,770 (149,682)
Other liabilities - (22,500)
------- ------
Net cash provided by (used in) continuing operations (962,286) 834,536
------- -------
Net cash provided by (used in) discontinued operations:
Loss from discontinued operations - (547,055)
Depreciation and amortization - 33,130
Discontinued operations - net - 15,750
------- ------
- (498,175)
------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (962,286) 336,361
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of division 492,785 25,000
Proceeds from sale of property and equipment 824,356 -
Proceeds from notes and loans receivable 275,436 69,996
Proceeds from collections from officers 53,083 70,231
Purchases of property, plant and equipment (160,159) (137,657)
------- -------
NET CASH PROVIDED BY INVESTING ACTIVITIES 1,485,501 27,570
--------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments of) short-term borrowings (131,002) 205,393
Proceeds from long-term notes 10,000 359,000
Payments of long-term notes (234,697) (177,720)
Payments of mortgage (1,057,748) (15,164)
Payments of note payable - related party (46,030) (2,250)
Proceeds from issuance of stock 414,000 540,500
Deferred offering costs (27,832) (190,042)
Deferred debt costs (93,469) (111,664)
Proceeds from private placement deposits - 185,000
-------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,166,778) 793,053
--------- -------
EFFECT OF EXCHANGE RATE CHANGES (17,717) -
------ ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (661,280) 1,156,984
CASH AND CASH EQUIVALENTS - beginning 1,365,198 208,214
--------- -------
CASH AND CASH EQUIVALENTS - ending $703,918 $1,365,198
======== ==========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-7
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------
1998 1997
---- ----
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<S> <C> <C>
Cash paid during the year for:
Interest $171,695 $296,421
Income taxes 13,145 6,433
SCHEDULES OF NON-CASH ACTIVITIES:
Warrants issued for services rendered $9,730 $25,000
Discount on repayment of mortgage debt 55,529 -
Offset of deferred offering costs
to paid in capital 66,942 -
Issuance of promissory notes upon closing of
Private placement units. 185,000 -
Issuance of note receivable for amounts due on
sale of division. 80,000 -
Sale of division, net of cash collected - 1,278,535
Conversion of debt into equity - 100,000
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-8
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Forward Industries was incorporated under the laws of the State of New
York and began operations in 1961. The Company is engaged in the design,
manufacture and marketing of custom-designed soft-sided carrying cases made
from leather, nylon, vinyl and other synthetic fabrics. The cases are used
primarily for the transport of portable devices such as cellular phones,
medical devices and computers. The Company markets products either as a direct
seller or as an other-equipment-manufacturer to customers in the United States,
Europe, Asia and Australia. For the years ended September 30, 1998 and 1997,
respectively, approximately 31% and 15% of its sales were to customers outside
of the United States.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Forward
Industries, Inc. ("Forward") and its wholly- and majority-owned subsidiaries
(together the "Company"). All significant intercompany transactions and
balances have been eliminated in consolidation.
REVENUE RECOGNITION
Revenue is recognized upon the shipment of products.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid money market accounts.
CREDIT RISK
ACCOUNTS RECEIVABLE - TRADE
Accounts receivable consist of open trade accounts with various
companies. The Company performs ongoing credit evaluations of its customers and
believes that adequate allowances for any uncollectible receivables are
maintained. The Company has not historically experienced significant losses in
extending credit to customers.
Two customers, accounted for 59%, and three customers accounted for
46%, of the Company's accounts receivable at September 30, 1998 and 1997,
respectively. These customers are substantial companies with good credit
worthiness. None of these customers are in default and payments are received
from them on a timely basis.
In 1998 and 1997, two customers accounted for 55% and 49% of net
sales, respectively.
F-9
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH
The Company maintains cash balances with financial institutions which
at times may be in excess of the FDIC insurance limit.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out
method) or market.
ECONOMIC DEPENDENCE
The Company is dependent on one of its suppliers for the purchase of
inventory. The Company purchased 46% and 44% of its inventory from this
supplier in Fiscal 1998 and Fiscal 1997, respectively. Management believes that
other suppliers could provide similar products on comparable terms. However, a
change in an individual supplier could delay shipment of product resulting in a
loss of sales which could affect operating results.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is
provided using the straight-line method over the estimated useful lives of the
assets. Expenditures for repairs and maintenance are charged to expense as
incurred.
DEFERRED OFFERING AND DEFERRED DEBT COSTS
Deferred offering costs represented amounts incurred in connection
with obtaining equity in the Company's 1997 Private Placement (see Note 15).
Such costs are charged against paid-in capital when the respective sales of the
units were closed.
Deferred debt costs were incurred in connection with obtaining debt
financing, either in the Company's 1997 Private Placement (see Note 15) or for
the Company's bank credit facility (see Note 8.). The costs are amortized over
the term of the debt issued. Amortization amounted to $107,192 and $12,780 for
the years ended September 30, 1998 and 1997, respectively.
ADVERTISING COSTS
Advertising costs are charged to operations when incurred. Advertising
costs amounted to $235,457 and $284,508 for the years ended September 30, 1998
and 1997, respectively.
F-10
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TRANSLATION OF FOREIGN CURRENCY
The foreign currency financial statements of divisions operating
outside the United States are translated in accordance with the requirements of
the Financial Accounting Standards Board. All income and expense accounts are
translated at average exchange rates; assets and liabilities, at current
exchange rates; and stockholders' equity at historical exchange rates.
INCOME TAXES
The Company utilized SFAS No. 109, "Accounting for Income Taxes,"
which requires the use of the liability method of accounting for income taxes.
The liability method measures deferred income taxes by applying statutory rates
in effect at the balance sheet date to the differences between the tax base of
assets and liabilities and their reported amounts in the financial statements.
The resulting deferred tax assets or liabilities are adjusted to reflect
changes in tax laws as they occur.
EARNINGS PER SHARE
The Company adopted SFAS No. 128, "Earnings Per Share" which
establishes new standards for computing and presenting earnings per share. This
statement also requires the restatement of all prior period earnings per share
data presented. Earnings per share are based on the weighted average number of
shares outstanding during each year presented. Common stock equivalents have
not been included in 1998 as their effect would be antidilutive.
RECENTLY ISSUED PRONOUNCEMENTS
The Company intends to adopt SFAS No. 130, "Reporting Comprehensive
Income" in fiscal 1999. This will require additional disclosure but will not
have a material effect on the Company's financial position or results of
operations. SFAS No. 130 will first be reflected in the Company's first quarter
of 1999 interim financial statements. Components of comprehensive income for
the Company include items such as net income and foreign currency translation
adjustments.
RECLASSIFICATIONS
Certain amounts have been reclassified to conform to the current year
presentation
NOTE 2 - RESTRUCTURING CHARGE
Upon an analysis of its business and operations, the Company commenced
a plan to streamline its operations and improve the Company's cost structure.
In August 1998, the Company entered into an agreement to sell certain
production equipment of a wholly-owned subsidiary, Koszegi Industries, Inc.
("Koszegi") to MedCovers, Inc. of Raleigh, North Carolina in order to establish
an alternate source of production. This action will allow the Company to close
its production facility, which has been operating at substantially less than
capacity. The majority of Koszegi's orders are now produced overseas.
Accordingly, the Company will not renew the lease for its production facility
in South Bend, Indiana, upon its expiration in February 1999.
F-11
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 2 - RESTRUCTURING CHARGE (CONTINUED)
In the fourth quarter, the Company recorded a restructuring charge of
approximately $897,000 ($.19 per basic share) in connection with the closing of
its production facility. The primary components of that charge were severance
and employee benefit costs for the elimination of manufacturing and
administrative support positions $360,000, markdown of property and equipment
to estimated realizable value $202,000, factory related expenses incurred
during the shutdown $285,000 and other costs $50,000.
NOTE 3 - INVENTORIES
<TABLE>
<CAPTION>
Inventories at September 30, 1998 are comprised of the following:
<S> <C>
Finished goods $ 862,708
Work-in-process 119,095
Raw materials and supplies 101,859
-------
$1,083,662
==========
NOTE 4 - NOTES RECEIVABLE
Notes receivable consist of the following at September 30, 1998:
Two non-interest bearing promissory notes received as part of the sale of the
Company's Advertising Specialties division (see Note 13) payable in equal
monthly installments of $23,611 commencing in October 1997 through
September 2000, and $2,879 commencing January 1998 through September 2000.
Interest on the notes has been imputed at a rate of 12 1/2%
per annum. The note is secured by the assets sold by the Company. $580,310
Subordinated note received as part of the sale of certain assets of its
Republic division in April 1994, payable in monthly installments of
$5,833 plus interest at the prime rate (not to exceed 9%) through May 2000. 116,278
-------
696,588
Less: current maturities 350,822
-------
$345,766
========
Maturities of notes receivable are as follows:
FISCAL YEAR ENDING
SEPTEMBER 30, AMOUNT
------------- ------
1999 $350,822
2000 345,766
-------
$696,588
========
</TABLE>
Interest income on the above notes receivable amounted to $105,211 and $19,314
for the years ended September 30, 1998 and 1997, respectively.
F-12
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at September 30, 1998 consists of the
following:
ESTIMATED USEFUL LIVES
----------------------
Land 25,000
Building and building improvements 108,721 10 - 20 years
Furniture, fixtures, and computer equipment 57,916 5 - 10 years
Leasehold improvements 55,086 *
Transportation equipment 37,257 3 years
------
283,980
Less: Accumulated depreciation
and amortization 96,526
------
$187,454
========
* Leasehold improvements are amortized on the straight-line method over the
terms of the leases or the estimated lives of the improvements, if shorter.
Depreciation expense amounted to $140,541 and $134,837 for the years
ended September 30, 1998 and 1997, respectively.
NOTE 6 - NOTES AND LOANS RECEIVABLE - OFFICERS
At September 30, 1998, notes and loans receivable - officers consist
of the following:
Note receivable in amounts of $10,000 per year, paid by the
end of each fiscal year from September 1996 through
September 2000 plus interest at 7% per annum $20,000
Note receivable in amounts of $18,490 per year, paid by
the end of each fiscal year from September 1999 until
such balance is paid plus interest at 6% per annum 92,452
Loan receivable, due on demand with interest at 6% per annum 3,821
-----
116,273
Less: Current maturities 32,311
------
$83,962
=======
F-13
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 6 - NOTES AND LOANS RECEIVABLE - OFFICERS (CONTINUED)
Maturities of notes and loans receivable - officers are as follows:
FISCAL YEAR ENDING
SEPTEMBER 30,
1999 $ 32,311
2000 28,490
2001 18,490
2002 18,490
2003 18,492
------
$116,273
========
Interest income on the above notes and loans amounted to $10,433 and
$12,441 for the years ended September 30, 1998 and 1997, respectively.
NOTE 7 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets at September 30, 1998
consist of the following:
Non-trade receivables $198,730
Prepaid insurance 53,616
Sundry others 91,190
------
$343,536
========
NOTE 8 - DEBT
BORROWINGS UNDER CREDIT LINE - BANK
In April 1998, the Company established a credit facility with a new
bank which provides for a maximum line of credit for working capital of $4.5
million, including letters of credit. Borrowing availability is determined by a
formula of accounts receivable and inventory. The interest rate on the
borrowings is prime plus three quarters of one percent. An additional $500,000
credit line is available for financing equipment. The line is scheduled to
mature on March 31, 2001. At September 30, 1998 amounts outstanding under the
new credit facility were $1,244,103. In April 1998, the Company paid to its
prior bank approximately $937,000, which represented all amounts owed under its
former credit facility. The former credit facility had a maximum availability
of $1.1 million and an interest rate in effect from time to time of the prime
rate plus 1 1/2%. In addition, at September 30, 1998 the Company was
contingently liable under letters of credit in the amount of $182,186.
The credit agreement provides for certain financial covenants. Forward
and Koszegi were not in compliance with some of these financial covenants at
September 30, 1998. The bank waived compliance with such covenants.
F-14
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 8 - DEBT (CONTINUED)
From time to time, the Company borrowed on letters of credit from a
corporation controlled by a relative of the principal stockholders. These
borrowings occurred prior to the establishment of the current credit facility
and bore interest at the prevailing market rate. At September 30, 1998, no
amount was owed.
Interest expense on the bank debt amounted to $94,588 and $140,882 for
the years ended September 30, 1998 and 1997, respectively. Interest to the
controlled corporation amounted to $14,529 and $31,537 for the years ended
September 30, 1998 and 1997, respectively.
OTHER DEBT
Other debt at September 30, 1998 consists of:
10% convertible promissory notes issued in connection with
the Company's 1997 Private Placement, payable on
December 4, 1998 (see Note 15; all notes were
converted into equity on that date.) $554,000
Less current maturities 554,000
--------
$ -
========
Interest expense on the above debt amounted to $51,967 and $38,656 for
the years ended September 30, 1998 and 1997, respectively.
NOTE 9 - MORTGAGE PAYABLE
The Company owned a building in Brooklyn, New York which was sold in
December 1997. The proceeds of $830,000 and working capital were used to repay
the balance of the mortgage. The Company recognized a profit of approximately
$669,000 on the sale, which is included in other income.
Interest expense on the mortgage amounted to $31,493 and $123,000,
respectively, for fiscal years ended September 30, 1998 and 1997 respectively.
Depreciation on the building, which is included in rental income,
amounted to $4,130 and $32,710 for fiscal years ended September 30, 1998 and
1997, respectively.
F-15
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 10 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities at September 30, 1998
consist of the following:
Accrued expenses related to plant restructuring $ 657,513
Accrued expenses to vendors and others 399,469
Accrued vacation 81,749
Accrued interest on convertible notes 61,143
Income taxes payable 18,700
------
$1,218,574
==========
NOTE 11- INCOME TAXES
The components of the deferred tax assets and liabilities at September
30, 1998 are as follows:
Current:
Accounts receivable $ 37,672
Inventory 188,560
Accrued expenses 409,768
Valuation allowance (389,368)
-------
246,632
-------
Non-current:
Net operating losses 1,508,508
Property, plant and equipment 24,358
Contribution carryover 79,023
Issuance of stock warrants 29,750
Accrued expenses 51,000
Valuation allowance (190,244)
-------
1,502,395
---------
Net deferred tax asset $1,749,027
==========
At September 30, 1998 and 1997 a valuation allowance is provided as it
is uncertain if certain deferred tax assets will be fully utilized.
Provision for income tax credits for the years ended September 30,
consists of the following:
1998 1997
---- ----
Current tax expense $ 18,700 $ 6,401
Deferred tax expense (218,164) 238,152
Change in valuation allowance 479,612 -
------- -------
280,148 244,553
Net benefit to discontinued operations - (143,918)
------- -------
$280,148 $100,635
======== ========
F-16
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 11 - INCOME TAXES (CONTINUED)
Reconciliation of statutory rate to effective income tax rate is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------
1998 1997
---- ----
<S> <C> <C>
Continuing operations:
At federal statutory rate 34.0% 34.0%
Effect of:
Temporary and permanent differences (65.7) (28.8)
Net operating loss carryforwards 31.7 (5.2)
Deferred income taxes 32.7 39.3
Miscellaneous 2.4 1.0
--- ---
35.1% 40.3%
===== =====
Discontinued operations:
At federal statutory rate - (34.0)%
Effect of:
Temporary and permanent differences - 28.8
Net operating loss - 5.2
Deferred income taxes - (39.3)
---- ----
- (39.3)%
==== ====
</TABLE>
At September 30, 1998, the Company has unused net operating loss
carryforwards and contribution carryforwards of approximately $4,277,000 and
$232,400 expiring through September 30, 2011 and 2003, respectively.
NOTE 12 - COMMITMENTS
The Company rents its facilities under leases expiring at various
dates through July 2001. In addition, the Company is leasing two warehouse
facilities on a month-to-month basis. Total rent expense for the years ended
September 30, 1998 and 1997 amounted to $407,814 and $350,893, respectively.
F-17
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 12 - COMMITMENTS (CONTINUED)
Minimum rental commitments under such leases for future fiscal years
are summarized below:
YEARS ENDED SEPTEMBER 30,
1999 $186,128
2000 63,528
2001 47,646
------
$297,302
========
EMPLOYMENT CONTRACTS
Effective October 1, 1997, the Company entered into an employment
agreement with its chief executive officer through September 30, 2000. The
agreement provided for an annual salary of $275,000 plus annual bonus
compensation generally equal to 5% of net pre-tax annual income of the Company
in excess of $1,000,000. Effective December 11, 1998, this agreement was
terminated and the Company entered into a consulting agreement with the
officer. Pursuant to this agreement, the officer will receive an annual
consulting fee of $200,000 for a period of five years, ending December 10,
2003. In addition, the officer will receive severance payments totaling
$350,000, of which $200,000 is payable on January 1, 1999 and $150,000 on the
fifteen months anniversary, and a reduction in the exercise price of his
450,000 options to $1.10 per share.
Effective October 1, 1998, the Company entered into an employment
agreement with an officer pursuant to which the officer is employed as chief
executive officer and vice chairman, and six months thereafter, as chairman,
through September 30, 2000. The agreement provides for an annual salary of
$201,600 plus an annual bonus equal to ten percent (10%) of the pre-tax
operating profit in excess of $675,000. In addition, the officer received
options to purchase 250,000 shares of common stock at an exercise price of
$1.75 per share. Of such options, options to purchase 125,000 of such shares
shall become exercisable every six months during the employment term, provided
that the officer is still employed by the Company. The agreement also provides
that the Company grant the officer options to purchase up to an additional
250,000 shares of common stock at an exercise price of $2.00 per share if the
Company's stock price averages $3.50 for a 180 day period.
Effective November 1, 1997, the Company entered into an employment
agreement with its executive vice president through October 31, 2000 at an
annual salary of $150,000, plus annual bonus compensation generally equal to
7.5% of net annual pre-tax income of the Company in excess of $1,000,000. In
April 1998, the officer was elected president (see below). Effective October 1,
1998, the Company and this executive agreed to a new contract which contained
the following provisions; annual salary of $230,000, bonus equal to 3 percent
of sales above $13,000,000 and additional stock options vested based on sales
performance levels during the term of the agreement. Such options will be
priced at marked value on the date of vesting and can be a maximum of 600,000
if sales levels of $21,000,000 are reached.
F-18
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 12 - COMMITMENTS (CONTINUED)
Effective October 14, 1996, the Company entered into a two-year
agreement contract with its president. The officer received an annual base
salary of $150,000, a signing bonus of $30,000 and an annual bonus based on the
Company's pre-tax income. The officer also received an option to purchase
150,000 shares of common stock vesting in four equal semi-annual installments
commencing October 14, 1996 provided that officer continues to be employed by
the Company. The officer resigned in April 1998. At the time of his
resignation, the officer held vested and exercisable options for the purchase
of 75,000 shares of common stock, all of which have since been exercised.
Amounts incurred under employment agreements amounted to $525,779 and
$609,170 for the years ended September 30, 1998 and 1997, respectively.
NOTE 13 - DISCONTINUED OPERATIONS
ADVERTISING SPECIALTIES DIVISION
On September 30, 1997, Koszegi sold certain of its assets, consisting
primarily of inventory and equipment relating to its Advertising Specialties
division ("ASI"), to Amplaco Group, Inc. ("Amplaco"). In addition, Amplaco
assumed certain liabilities of Koszegi, including a portion of Koszegi's lease
obligations with respect to its manufacturing facility in South Bend, Indiana.
The selling price was $1,445,000 and was received as follows:
1. $500,000 in cash.
2. The receipt of two non-interest bearing secured promissory notes
for $850,000 and $95,000 (see Note 4).
Koszegi recognized a gain on the sale of $533,900 during the year
ended September 30, 1997.
The sale of ASI was accounted for as a discontinued operation and the
consolidated statements of operations have been restated accordingly. The
assets sold at September 30, 1997 were as follows:
Inventory $ 647,785
Property, plant and equipment (net) 13,732
------
$ 661,517
==========
Summarized results of ASI for the year ended September 30, 1997 were
as follows:
Net sales $2,311,127
==========
Loss from operations before income tax benefit (900,544)
Income tax benefit (353,489)
-------
Loss from operations (547,055)
-------
Gain on disposal before income taxes 533,900
Income taxes 209,571
-------
Gain on disposal 324,329
-------
Total loss on discontinued operations $ (222,726)
===========
F-19
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 14 - RELATED PARTY TRANSACTIONS
NOTE PAYABLE
At September 30, 1998, note payable - related party consists of the
following:
Note payable to a relative of a principal stockholder/
officer on September 1, 2000, bearing interest at
10% per annum. It is management's intent to repay
the note during fiscal 1999. $42,670
Less: Current maturities 42,670
-------
$ -
=======
Interest amounted to $8,000 and $10,020 for the years ended September
30, 1998 and 1997, respectively.
OTHERS
For the year ended September 30, 1998, the Company incurred consulting
fees totaling $40,000 to a corporation whose principal stockholder is a
stockholder of the Company.
For the year ended September 30, 1997, the Company incurred expenses
relating to the acquisition of equity and debt financing totaling $11,502 to
the same corporation referred to above.
NOTE 15 - STOCKHOLDERS' EQUITY
COMMON AND PREFERRED STOCK
On January 13, 1997, the Company increased the number of authorized
shares from fourteen million (14,000,000) to forty-four million (44,000,000),
of which four million have been designated as preferred stock.
On January 13, 1997, the Board of Directors declared a one-for-two
reverse stock split which became effective as of December 23, 1997. All share
data and per share amounts have been adjusted to reflect the reverse stock
split on a retroactive basis.
PRIVATE PLACEMENT
Between May and December 1997, the Company sold through a Private
Placement, 55.4 units at a price of $25,000 per unit. Each unit consisted of
the following:
1. 30,000 shares of common stock.
2. A warrant to purchase up to 30,000 shares of common stock at $4.00 per
share through March 15, 1999.
3. An unsecured 10% convertible promissory note in the amount of $10,000
payable on December 4, 1998. The notes are convertible, at the sole
option of the Company, into 20,000 shares of common stock and one
warrant (same terms as described in #2). If the Company exercises its
option to convert any outstanding notes, then it must convert all of
the notes.
F-20
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 15 - STOCKHOLDERS' EQUITY (CONTINUED)
On December 4, 1998, the Company paid approximately $72,000 of accrued
interest and converted the $554,000 of convertible promissory notes into
1,108,000 common shares and warrants to purchase 1,662,000 common shares.
Accordingly, $554,000 will be reflected in stockholders' equity in the
Company's first fiscal quarter in 1999.
WARRANTS
On September 26, 1994, the Company issued a warrant to purchase
350,000 shares of common stock at an exercise price of $.01 per share. The
warrant was issued pursuant to a two year consulting agreement and was
exercisable over a four year period. Based on a market valuation of $.375 per
share, the expense recognized over the life of the agreement was $127,750.
During the years ended September 30, 1997 and 1996, 100,000 shares and 250,000
shares were purchased, respectively.
In February 1995, the Company issued an additional warrant to a
financial consultant to purchase 100,000 shares at $2.00 per share pursuant to
the terms of a four year agreement. Based on a market valuation of $3.00 per
share, the expense to be recognized over the life of the agreement is $100,000.
During the year ended September 30, 1996, 12,500 shares were purchased. In 1997
and 1998, no shares were purchased.
For the years ended September 30, 1998 and 1997, the amount charged to
operations and credited to paid-in capital were $9,730 and $25,000,
respectively.
In December 1994, the Company issued 500,000 units which included one
Class A warrant and one Class B warrant under the terms of a private placement.
The terms of the warrants are as follows:
NUMBER OF SHARES EXERCISE
PER WARRANT PRICE EXPIRATION DATE
----------- ----- ---------------
Class A 1 $3.50 December 31, 1996
Class B 1 .50* December 31, 1998
*On November 20, 1998, the exercise price was reduced from $5.00 to $.50.
The Class A warrants have expired. No warrants were exercised in
Fiscal 1998 or 1997.
Outstanding warrants at September 30, 1998 are as follows:
OUTSTANDING EXERCISE
ISSUE WARRANTS PRICE EXPIRATION DATE
----- -------- ----- ---------- ----
Class B Warrants 219,000 $ .50 December 31, 1998
Consultant's Warrants 87,500 $2.00 January 31, 1999
1997 Private Placement 1,662,000 $4.00 March 15, 1999
---------
1,968,500
=========
On December 4, 1998, the Company converted its notes payable, as
described above, and issued 1,662,000 additional warrants at an exercise price
of $4.00 per share. These warrants expire on March 15, 1999.
F-21
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 15 - STOCKHOLDERS' EQUITY (CONTINUED)
OPTIONS
In October 1994, the Company granted options for two officers of the
Company to purchase 150,000 shares of common stock each at a price of $1.50 per
share, which was in excess of market value at that time. On December 11, 1998,
as part of a new consulting agreement with one of the officers, the exercise
price was reduced to $1.10 per share. The options are exercisable over a five
year period commencing December 1, 1995. No options were exercised in Fiscal
1998 and 1997.
On February 12, 1996, the Board of Directors adopted the 1996 Stock
Option Plan under which no options were exercised. The Plan was cancelled in
December 1996.
In December 1996, the Board of Directors adopted the 1996 Stock
Incentive Plan, pursuant to which up to four million (4,000,000) shares of
common stock may be issued to officers and employees of the Company upon the
exercise of incentive stock options and nonqualified stock options. The
exercise price of the incentive options may not be less than the fair market
value of the common stock at the date the option is granted. The exercise price
of the nonqualified options is established by the stock option committee. All
options expire ten years after the date of grant and vest as follows; 37% after
one year, 67% after two years and fully vest after three years. In the years
ended September 30, 1998 and 1997, the Company issued an aggregate of 750,000
options including 300,000 options each to two of the Company's officers. During
the year ended September 30, 1998, a former officer of the Company exercised
75,000 options providing proceeds to the Company of $121,500.
A summary of stock option activity follows for the respective fiscal
years:
<TABLE>
<CAPTION>
1998 1997
------------------------- -------------------------
Exercise Exercise
Shares Prices Shares Prices
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance Beginning of Year 1,171,250 $1.01 - $2.00 900,000 $1.10 - $2.00
Granted 28,750 $2.25 - $3.00 271,250 $1.62 - $2.00
Exercised (75,000) $1.62 -
Canceled (75,000) $1.62 -
------ ---------
Balance End of Year 1,050,000 $1.10 - $3.00 1,171,250 $1.10 - $2.00
========= =========
</TABLE>
Of the total outstanding options at September 30, 1998, 300,000
options expire in Fiscal 2000, 721,250 in Fiscal 2007 and 28,750 in Fiscal
2008.
NOTE 16 - 401(K) PLAN
The Company has a 401(k) profit sharing plan covering substantially
all employees who meet eligibility requirements.
Profit sharing expense amounted to $24,866 and $25,195 for the years
ended September 30, 1998 and 1997, respectively.
F-22
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The amounts at which cash and cash equivalents, accounts receivable,
long-term debt, accounts payable and accrued expenses and other current
liabilities are presented in the balance sheet approximate their fair value due
to their short maturities. The amounts at which bank debt and note payable -
related party are presented in the balance sheet approximate their fair value
as their interest rates are comparable to other similar types of debt.
The following table presents the carrying amounts and fair values at
September 30, for the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Notes receivable $696,598 $687,257 $892,024 $872,249
Notes and loans
receivable - officers 116,273 90,658 210,308 182,353
</TABLE>
The fair values of the above items have been determined based on
discounted cash flow using a market rate of interest at the balance sheet date
as applicable to comparable items.
NOTE 18 - ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," but applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
the stock options granted. No expense was recognized in the year ended
September 30, 1998 and 1997. If the Company had elected to recognize expense in
the year ended September 30, 1998 and 1997 for the stock options granted based
on the fair value at the date of grant consistent with the method prescribed by
SFAS No. 123, net income and income per share would have been changed to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
---- ----
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $(1,078,776) $(1,090,969) $139,434 $32,131
Income (loss) per share $ (.23) (.23) .04 .01
</TABLE>
The fair value of the stock options used to compute pro forma net loss
and loss per share disclosures is the estimated present value at grant date
using the Black-Scholes option-pricing model with the following weighted
average assumptions: expected volatility of 25% (1997- 39%); risk-free interest
rate of 4.3% (1997- 6%); and an expected holding period of five years.
F-23
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 19 - YEAR 2000 COMPLIANCE
The Company has been required to address the issue of software
applications which are unable to recognize 'OO' in their program code. The
Company has evaluated its alternatives and concluded that acquiring a new data
system, rather than upgrading its existing systems and applications, is of
greater long-term value. The Company will spend approximately $125,000, during
the first two quarters of fiscal 1999, primarily to install new hardware and
software. The Company expects to incur internal staff costs associated with
training. Cost of staff time will be expensed as incurred, while cost of the
new system will be capitalized and amortized over its useful life.
F-24
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED TO END OF
OF YEAR OPERATIONS DEDUCTIONS YEAR
------- ---------- ---------- ----
DESCRIPTION
-----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended September 30, 1997 $50,000 $41,333 $ - $91,333
Year ended September 30, 1998 91,333 19,467 - 110,800
</TABLE>
F-25
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------
1998 1997
---- ----
NUMERATOR
<S> <C> <C> <C>
Income (loss) from continuing operations:
Income (loss) from continuing operations ($1,078,776) $362,160
Preferred dividends - -
---------- --------
(1,078,776) BASIC 362,160
Impact of potential common shares:
Convertible debt N/A 9,000
---------- --------
($1,078,776) DILUTED $371,160
========== ========
Loss from discontinued operations - ($222,726)
========== ========
DENOMINATOR
Weighted average number of common
shares outstanding - see schedule 4,650,641 BASIC 3,314,295
Impact of potential common shares:
Stock options and warrants N/A 37,545
Convertible debt N/A 150,000
--- -------
4,650,641 DILUTED 3,501,840
========= =========
BASIC EPS
Income from continuing operations $(.23) $.11
Discontinued operations - (.07)
----- ----
$(.23) $.04
===== ====
DILUTED EPS
Income from continuing operations $(.23) $.11
Discontinued operations - (.07)
------ ----
$(.23) $.04
====== ====
</TABLE>
NOTE - For the year ended September 30, 1998, common stock equivalents have not
been included as their effect would be antidilutive. Common stock equivalents
include stock options and warrants and convertible debt.
F-26
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE
CALCULATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
-------------------------
1998 1997
---- ----
<S> <C> <C>
1. STOCK OPTIONS
TREASURY STOCK METHOD APPLIED TO
STOCK OPTIONS
SALE OF COMMON STOCK
TOTAL OPTIONS AND WARRANTS OUTSTANDING 1,121,250 450,000
AVERAGE PRICE $ 1.87 $ 1.54
---------- --------
TOTAL $2,091,719 $693,750
========== ========
REPURCHASE OF COMMON STOCK
PROCEEDS $2,091,719 $693,750
AVERAGE STOCK PRICE $ 2.48 $ 1.68
---------- --------
SHARES REPURCHASED 845,058 412,455
========== ========
NET INCREASE IN SHARES
SHARES SOLD 1,121,250 450,000
SHARES REPURCHASED 845,058 412,455
========== ========
INCREASE IN SHARES 276,192 37,545
========== ========
2. CONVERTIBLE DEBT
TERMS:
INTEREST RATE 10% 10%
PAR 10,000 N/A
CONVERTIBLE INTO SHARES 20,000 150,000
CONVERSION PRICE N/A $ 1.00
# OF UNITS 55.4 N/A
TOTAL DEBT $ 554,000 $150,000
IF CONVERTED METHOD APPLIED TO CONVERTIBLE DEBT
NUMERATOR INCREASE - INTEREST SAVINGS
ASSUMING A 40% TAX RATE $ 33,240 $ 9,000
========== ========
DENOMINATOR INCREASE - ASSUMING CONVERSION 1,108,000 150,000
========== ========
</TABLE>
F-27
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE
COMPUTATION OF WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1998 WEIGHTED
DATES SHARES FRACTION OF AVERAGE
OUTSTANDING OUTSTANDING PERIOD SHARES
----------- ----------- ------ ------
<S> <C> <C> <C>
October through November 4,138,141 2/12 689,690
Common stock issued in connection
with private placement in December 585,000
-------
December through May 4,723,141 6/12 2,361,571
Exercise of stock options into
common stock in June 75,000
------
June through September 4,798,141 4/12 1,599,380
---------
WEIGHTED AVERAGE SHARES 4,650,641
=========
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1997
PERIOD WEIGHTED
DATES SHARES HELD IN AVERAGE
OUTSTANDING OUTSTANDING DAYS SHARES
----------- ----------- ---- ------
<S> <C> <C> <C>
October 1 2,861,141 365 2,861,141
Exercise of stock warrants into
common stock in October 100,000 350 95,890
-------
October through January 2,961,141
Conversion of debt to
common stock in February 100,000 227 62,192
-------
February through April 3,061,141
Issuance of common stock in connection
with private placement in May 330,000 138 124,767
-------
May through June 3,391,141
Issuance of common stock in connection
with private placement in July 747,000 83 170,305
------- -------
July through September 4,138,141
WEIGHTED AVERAGE SHARES 3,314,295
=========
</TABLE>
F-28
<PAGE>
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT'S ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As of June 9, 1997, the Board of Directors of the Company approved the
resignation Miller, Ellin & Company ("Miller, Ellin") as the company's
independent accountants and the engagement of Patrusky, Mintz & Semel
("Patrusky") as the company's independent accountants. The reports of Miller,
Ellin on the Company's financial statements as of and for the two fiscal years
ended September 30, 1995 and September 30, 1996 did not contain an adverse
opinion or a disclaimer of opinion, and was not qualified or modified as to
uncertainty, audit scope, or accounting principles.
During the Company's two fiscal years ended September 30, 1995 and
September 30, 1996 and subsequent period through June 9, 1997 there were no
disagreements between the Company and Miller, Ellin concerning any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Miller, Ellin, would have caused it to make reference to the subject matter of
the disagreements in connection with its reports.
The Company did not consult with Patrusky during the company's two
fiscal years ended September 30, 1995 and September 30, 1996 and subsequent
period through June 9, 1997 on the application of accounting principles to a
specified transaction; the type of opinion that might be rendered on the
Company's financial statements; any accounting, auditing or financial reporting
issue; or any item that was either the subject of a disagreement or a
reportable event as defined in Item 304 of Regulation S-B.
The Company provided Miller, Ellin with a copy of the disclosures
contained herein and has filed as an exhibit to the company's Current Report on
Form 8-K dated June 9, 1997 the response of Miller, Ellin to such disclosure.
-20-
<PAGE>
PART III
ITEM 9 - DIRECTORS EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
DIRECTORS AND EXECUTIVE OFFICERS.
The directors and executive officers of the Company as of December 23, 1998
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
Theodore H. Schiffman 65 Chairman of the Board
Jerome E. Ball 60 Chief Executive Officer and Vice Chairman of the Board (1)
Michael Schiffman 33 President, Chief Operating Officer and Director (2)
Noah Fleschner 62 Director
Samson Helfgott 59 Director
Philip B. Kart 49 Chief Financial Officer and Vice President (3)
Stephen Schiffman 30 Secretary and Vice President of Marketing and Sales for
Terrapin
</TABLE>
(1) Jerome E. Ball was appointed Chief Executive Officer and Vice Chairman of
the Company in October 1998 upon the resignation of Theodore H. Schiffman
as Chief Executive Officer.
(2) Michael Schiffman served as the Company's Executive Vice President until
April 1998 when he was appointed President and Chief Operating Officer,
replacing William Mooar, who resigned from the Company.
(3) Philip B. Kart was appointed Chief Financial Officer of the Company
effective February 2, 1998. Prior to Mr. Kart's appointment, Theodore H.
Schiffman served as the Company's Chief Financial Officer.
Each of the directors holds office until the next annual meeting of
shareholders and until his successor has been duly elected and qualified.
THEODORE H. SCHIFFMAN, a co-founder of the Company, has been its
Chairman and Chief Executive Officer for more than the past five years and has
been a director since 1961. He became Chief Financial Officer in July of 1996
and served in that role until February 1998. In October 1998, Mr. Schiffman
tendered his resignation and agreed to a five-year consulting and severance
arrangement with the Company. The agreement calls for Mr. Schiffman to retain
his position as Chairman for six months after the date Mr. Ball joined the
Company as Vice Chairman. At such time, Mr. Ball will assume the position of
Chairman and Mr. Schiffman will become Chairman Emeritus.
JEROME E. BALL became Chief Executive Officer and Vice Chairman of the
Board effective October 1, 1998. Before joining Forward Industries Mr. Ball
served as Chairman and Chief Executive Officer of George Arzt Communications, a
full service public relations firm. Prior to that, Mr. Ball had been president
of Balson-Hercules Group, a textile manufacturing company which was sold to a
Canadian Stock Exchange listed company, Consoltex Group, Inc., Ltd., where he
served until 1996. Mr. Ball will assume the role of Chairman six months after
the date of joining the Company.
MICHAEL SCHIFFMAN has been employed by the Company in various
capacities and became a director in April 1992. Beginning as a salesman for the
Company's advertising specialties products in 1985, Mr. Schiffman became
marketing manager for such products in 1987 and, following the acquisition of
the custom carrying case business in 1989, was appointed General Manager of
that division. Mr. Schiffman has been the Company's Executive Vice-President
and a director since 1992. From 1995 through June 1998, Mr. Schiffman was on
assignment in Hong Kong due to the growing importance of foreign production.
Upon his return, he was appointed to President and Chief Operating Officer of
the Company. Michael Schiffman is the
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<PAGE>
son of Theodore H. Schiffman and the brother of Stephen Schiffman. See Item 1.
"Description of Business-Production and Materials."
NOAH FLESCHNER has been Chairman of the Board and Chief Executive
Officer of Diversified Data Equipment Corp. and Verified System Solutions,
Inc., sellers of new and used computer equipment to dealers and commercial
end-users, for more than the past five years. Mr. Fleschner is a Certified
Public Accountant. Mr. Fleschner became a director of the Company in October
1994.
SAMSON HELFGOTT is a founding partner in the law firm of Helfgott &
Karas, P.C. Prior to founding Helfgott & Karas, P.C., for 15 years Mr. Helfgott
served as Counsel, in New York, to General Electric Company. Prior to his
employment at General Electric, Mr. Helfgott was a Patent Attorney for Western
Electric Company and for IBM Corporation. He has also worked in private
practice for various law firms. Mr. Helfgott holds a Doctorate of Laws degree,
cum laude, from Fordham University and is a member of the Bar of the State of
New York and is admitted to practice before the United States Patent and
Trademark Office and the Canadian Patent Office, the United States Court of
Appeals for the Federal Circuit, and the Supreme Court of the United States.
Mr. Helfgott became a director of the Company in February 1998.
PHILIP B. KART became Vice President and Chief Financial Officer of
the Company in February 1998. Mr. Kart has 23 years of financial and corporate
planning experience. Mr. Kart served as Chief Financial Officer of OnGard
Systems, Inc., a publicly held manufacturer of medical equipment, from March
1994 until December 1997. From 1989 until March 1994, Mr. Kart was a principal
in Big Stone Partners, a financial consulting firm, and prior to that he held
management positions with Agrigenetics Corporation and Union Carbide. Mr. Kart
is a Certified Public Accountant and was employed by Price Waterhouse. Mr. Kart
received an MBA from City College of New York.
STEPHEN SCHIFFMAN has been employed by the Company in various
capacities for more than the past five years. Beginning in 1990, Mr. Schiffman
was employed in the production department, followed by a move to the Purchasing
Department and Inventory Control in the Forward Division. Subsequently, Mr.
Schiffman moved to the Marketing Department of the Koszegi division in 1995.
Presently, Mr. Schiffman is Vice-President of Marketing and Sales for Terrapin
and Secretary of the Company. Stephen Schiffman is the son of Theodore H.
Schiffman and the brother of Michael Schiffman.
Pursuant to their respective employment agreements with the Company,
(a) Theodore Schiffman was employed as Chief Executive Officer through
September 30, 2000, however, effective October 1, 1998, Mr. Schiffman tendered
his resignation and agreed to a five-year consulting and severance arrangement;
(b) Michael Schiffman is employed as President and Chief Operating Officer
through September 30, 2001 and the Company has agreed to use its best efforts
to elect him annually as a director; and (c) Jerome Ball is employed as Chief
Executive Officer and Vice Chairman, effective October 1, 1998 through
September 30, 2000, and will assume the position of Chairman six months after
his commencement with the Company. See Item 10; "Executive Compensation"
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934.
During Fiscal 1998, there were no delinquent filings by any reporting
persons of the Company under Section 16(a) of the Securities Exchange Act of
1934.
ITEM 10 - EXECUTIVE COMPENSATION
SUMMARY OF COMPENSATION IN FISCAL 1998, 1997 AND 1996
The following table sets forth certain summary information regarding
all cash and non-cash compensation paid by the Company during Fiscal 1998,
Fiscal 1997 and Fiscal 1996 to each of its executive officers earning more than
$100,000.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Securities
Name and Fiscal Other Annual Underlying All Other
Principal Position Year Salary Compensation Options Compensation
- ------------------ ------ ------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Theodore H. Schiffman, 1998 $268,000 -- -- --
Chairman of the Board, 1997 $275,000 -- 300,000 shares --
Chief Executive Officer 1996 $275,000 -- 150,000 shares
Michael Schiffman, 1998 $182,210 -- (a) --
Executive Vice President 1997 $150,000 -- (a) 300,000 shares --
1996 $112,500 -- (a) 150,000 shares
William E. Mooar 1998 $ 75,000 -- -- --
President (until 1997 $150,000 $30,000(b) 150,000 shares (c) --
April 1998) 1996 -- -- -- --
</TABLE>
(a) Does not include rental value of apartment and related expenses provided
to Mr. Schiffman, aggregating approximately $9,000 per month since July
1995, while on Company assignment in Hong Kong.
(b) Signing bonus received upon entering into employment agreement with the
Company.
(c) At the time of his resignation, Mr. Mooar held vested and exercisable
options for the purchase of an aggregate of 75,000 shares of Common Stock,
all of which have since been exercised.
EMPLOYMENT AGREEMENTS
Effective October 1, 1997, the Company entered into an employment
agreement with Theodore H. Schiffman (the "THS Agreement") pursuant to which
Mr. Schiffman was employed as Chief Executive Officer of the Company. The THS
Agreement provided for an annual salary of $275,000 plus annual bonus
compensation generally equal to 5% of net pre-tax annual income of the Company
in excess of $1,000,000 (which is determined without taking into consideration
bonus compensation payable to any employee, including Mr. Schiffman). Effective
October 1, 1998, this agreement, which was due to expire on September 30, 2000,
was terminated and the Company entered into a consulting agreement with Mr.
Schiffman (the "THS Consulting Agreement"). Pursuant to this agreement, Mr.
Schiffman will receive an annual consulting fee of $200,000 for a period of
five years, ending September 30, 2003. In addition, Mr. Schiffman will receive
severance payments totaling $350,000, of which $200,000 is payable on January
1, 1999 and $150,000 on the 15th-month anniversary thereof and a reduction in
the exercise price of his 450,000 options to $1.10 per share. Mr. Schiffman
will step down as Chairman six months from the date Mr. Ball joined the Company
and thereafter become Chairman Emeritus. If Mr. Schiffman dies during his
consulting term, and if the Company is the recipient of at least $1,000,000 of
proceeds of insurance on his life, the Company will pay to his widow, or if his
wife has predeceased him, his estate, a monthly death benefit of $10,000 for a
ten-year period. If the Company is not the recipient of at least $1,000,000 of
insurance, such monthly death benefit will be paid for a period of three years,
followed by a monthly death benefit of $5,000 for seven years; if his widow
dies prior to the end of such ten year period, such payments will cease. The
THS Consulting Agreement may be terminated as a result of bad faith conduct on
the part of Mr. Schiffman. In addition, Mr. Schiffman has agreed to a three
year non-compete arrangement and to maintain confidentiality of trade secrets
and work product.
Effective October 1, 1998, the Company entered into an employment
agreement with Jerome E. Ball (the "JEB Agreement") pursuant to which Mr. Ball
is employed as Chief Executive Officer and Vice Chairman, and six months
thereafter, as Chairman, through September 30, 2000. The JEB Agreement provides
for an annual salary of $201,600 plus an annual bonus equal to ten (10%)
percent of the pre-tax operating profit in excess of $675,000 (which is
determined without taking into consideration bonus compensation payable to any
individual). In addition, Mr. Ball received options to purchase 250,000 shares
of Common Stock at an exercise price of $1.75 per share. Of such options,
options to purchase 125,000 of such
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<PAGE>
shares become exercisable every six months during the employment term, provided
that Mr. Ball is still employed by the Company. The JEB Agreement also provides
that the Company grant Mr. Ball options to purchase up to an additional 250,000
shares of Common Stock at an exercise price of $2.00 per share if the Company's
stock price averages $3.50 for a 180 day period.
Effective November 1, 1997, the Company entered into an employment
agreement with Michael Schiffman, employing Mr. Schiffman as Executive Vice
president of the Company through October 31, 2000 at an annual salary of
$150,000, plus annual bonus compensation generally equal to 7.5% of net annual
pre-tax income of the Company in excess of $1000,000 (which is determined
without taking into consideration bonus compensation payable to any employee,
including Mr. Schiffman). Effective April 1, 1998, Mr. Schiffman replaced
William Mooar as President and Chief Operating Officer of the Company following
Mr. Mooar's resignation in April, 1998.
Effective October 1, 1998, the Company entered into an employment
agreement with Michael Schiffman, employing Mr. Schiffman as President and
Chief Operating Officer of the Company through September 30, 2001 at an annual
salary of $230,000, plus annual bonus compensation equal to 3% of all sales by
the Company over $13 million per year, payable on a pro rate basis quarterly
during the following fiscal year. In addition, Mr. Schiffman was granted
options to purchase up to 600,000 shares of Common Stock at the then current
market price, vesting in equal 200,000 share amounts, contingent upon the
Company achieving sales of $16 million, $18.5 million, and $21 million in any
fiscal year.
Effective October 14, 1996, the Company entered into an employment
agreement (as amended, the "WEM Agreement") with William Mooar, pursuant to
which Mr. Mooar served as President of the Company and performed duties for the
Company of a senior executive nature until his resignation in April 1998.
Simultaneously, Mr. Mooar became a director of the Company. Mr. Mooar was
employed at an annual base salary of $150,000, and received a signing bonus of
$30,000 and received incentive compensation with respect to each fiscal year of
the Company ending during the term of the WEM Agreement equal to the product of
(i) $100,000, and (ii) a fraction, the numerator of which was the Company's
audited pre-tax operating profit (if any) for such fiscal year and the
denominator of which was $500,000. The WEM Agreement provided that Mr. Mooar
receive an option to purchase 150,000 shares of Common Stock at an exercise
price equal to the fair market value of such shares as of the date of the
approval of the shareholders of the Company thereof. The option was to vest in
four equal semi-annual installments commencing October 14, 1996, provided that
Mr. Mooar continued in the Company's employ at such vesting date. The WEM
Agreement also provided that the Company grant Mr. Mooar an additional option
(the "Incentive Option") to purchase an additional 250,000 shares of Common
Stock if the Company's audited pre-tax operating income for its 1997 or 1998
fiscal year was at least $1,000,000. Effective April 1, 1998, William Mooar
resigned as President of the Company. At the time of his resignation, Mr. Mooar
held vested and exercisable options for the purchase of an aggregate of 75,000
shares of Common Stock, all of which have since been exercised.
OPTION GRANTS
The following table indicates all option grants to each of the
individuals named in the Summary Compensation Table during Fiscal 1998.
OPTION GRANTS IN FISCAL 1998
None.
STOCK OPTIONS HELD AT END OF FISCAL 1998
The following table indicates the total number of exercisable and
unexercisable stock options held by each executive officer named in the Summary
Compensation Table as of September 30, 1998. No options to purchase Common
Stock were exercised during Fiscal 1998 and no stock appreciation rights were
outstanding during Fiscal 1998. No options were in-the-money at the end of
Fiscal 1998.
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<PAGE>
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised
Options at September 30, 1998
------------------------------
Name Exercisable Unexercisable
- ---- ----------- -------------
<S> <C> <C>
Theodore H. Schiffman 351,000 99,000
Michael Schiffman 351,000 99,000
</TABLE>
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth below is information, as of December 23, 1998, with respect
to the beneficial ownership of the Common Stock by (i) each person or group who
is known by the Company to be the beneficial owner of 5% or more of the
outstanding Common Stock, (ii) each of the directors of the Company, (iii) each
of the executive officers of the Company named in the compensation table under
Item 10, "Executive Compensation", and (iv) all directors and executive
officers of the Company, as a group (five persons). Information as to Robert S.
Ellin and related investors is based on a Schedule 13D, as amended, filed by
such group.
<TABLE>
<CAPTION>
Number of Shares Percent
Identity of Beneficial Owners Of Common Stock of Class
- ----------------------------- --------------- --------
<S> <C> <C>
Theodore H. Schiffman 572,000 shares (a)(b)(c) 9.1%
400 Post Avenue
Westbury, New York 11590
Jerome E. Ball 410,000 shares (d) 6.7%
400 Post Avenue
Westbury, New York 11590
Robert S. Ellin and related investors 1,372,450 shares(e) 20.5%
750 Lexington Avenue
New York, NY 10022
Michael Schiffman 851,327 shares (b)(c)(f) 13.2%
400 Post Avenue
Westbury, New York 11590
William E. Mooar
Samson Helfgott 75,000 shares *
400 Post Avenue
Westbury, New York 11590
Noah Fleschner 330 shares *
400 Post Avenue
Westbury, New York 11590
Samson Helfyott
400 Post Avenue
Westbury, New York 11590
All directors and executive 1,974,907 shares 29.3%
officers as a group (5 persons) (a)(b)(d)(f)(g)
</TABLE>
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<PAGE>
(a) Includes 40,700 shares owned by Mr. Schiffman's wife, as to all of which
shares Mr. Schiffman disclaims beneficial ownership.
(b) Includes 150,000 shares subject to options granted by the Company on
October 12, 1994 to each of Theodore H. Schiffman and Michael Schiffman at
an exercise price of $1.50 per share and 201,000 shares subject to options
granted by the Company on November 15, 1996 to each of Theodore H.
Schiffman and Michael Schiffman at an exercise price of $2.00 per share.
Theodore H. Schiffman's option price, for all such options was reduced to
$1.10 in connection with his resignation and the THS Consulting Agreement.
(c) Theodore H. Schiffman, the Chairman of the Board and the Chief Executive
Officer of the Company, is the father of Michael Schiffman, the Executive
Vice President and a director of the Company and Stephen Schiffman, the
Secretary of the Company. Each of Theodore H. Schiffman, Michael Schiffman
and Stephen Schiffman disclaims beneficial ownership of shares
beneficially owned by the others.
(d) Includes 240,000 shares of Common Stock issuable upon the exercise of
private Placement Warrants.
(e) Includes (i) 199,500 shares of Common Stock owned by Atlantis Equities,
Inc. ("Atlantis"), a corporation for which Mr. Ellin is the sole officer
and director, (ii) 91,950 shares of Common Stock issuable upon the
exercise of Class B Warrants held by Atlantis, (iii) 37,500 shares of
Common Stock owned by Robert Ellin Family 1997 Trust (the "Trust"), of
which Mr. Ellin's father is the trustee and of which his minor children
are the beneficiaries as to which Mr. Ellin disclaims beneficial
ownership, (iv) 89,500 shares of Common Stock owned by Mr. Ellin, (v)
148,000 shares of Common Stock owned by the Robert Ellin Profit Sharing
Plan (the "Plan") of which Mr. Ellin is the beneficiary, (vi) 108,000,
15,000 and 75,000 shares of Common Stock issuable upon the exercise of
Private Placement Warrants held by Mr. Ellin, Atlantis, and the Plan,
respectively, (vii) 108,000 shares of Common Stock issuable upon the
exercise of Private Placement Warrants held by Mr. Ellin, (viii) 15,000
shares of Common Stock issuable upon the exercise of Private Placement
Warrants held by Atlantis, (ix) 210,000 shares of Common Stock issuable
upon the exercise of Private Placement Warrants held by the Plan, and (x)
110,000 shares of Common Stock and 165,000 shares of Common Stock issuable
upon the exercise of Private Placement Warrants held by Nancy J. Ellin,
the wife of Mr. Ellin.
(f) Includes 150,000 shares of Common Stock issuable upon the exercise of
Private Placement Warrants.
(g) Includes 4,625 shares subject to options, in addition to those referred to
in notes (a)(b)(d) and (f).
* Less than 1.0%.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has made unsecured loans from time to time to Mr. and Mrs.
Theodore H. Schiffman and to Mr. Schiffman's son Michael Schiffman. As of
September 30, 1998, (a) Theodore A Schiffman had executed a promissory note to
the Company in the principal amount of $235,535, bearing interest at 6% per
annum, payable annually on September 30 of each year, commencing September 30,
1996, with the first four installments each in the sum of $50,000 and the
remaining installment in the sum of the balance due, of which, the principal
amount of $92,452, plus interest, remains due; Mr. Theodore Schiffman did not
make the last required payment during Fiscal 1998, pending finalization of the
THS Consulting Agreement which requires repayment of the loan in full out of
his consulting fee over the term of such agreement, and (b) Michael Schiffman
had executed a similar note in the principal amount of $50,000 in principal
amount, bearing interest at 7% per annum, payable in equal annual installments
of $10,000 each September 30 commencing September 30, 1996 through September
30, 2000, of which $20,000 in principal amount, plus interest, remains due. The
balance of the loan to Mrs. Schiffman at September 30, 1998, $3,821, is due on
demand with interest of 6% per annum.
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<PAGE>
Theodore H. Schiffman's son, Stephen Schiffman, is employed by the
Company at an annual salary of $42,000. Stephen Schiffman is the Company's
Secretary and an administrator of the Company's Terrapin(TM) line of notebook
computer carrying cases.
Jerome E. Ball, Chief Executive Officer of the Company, purchased one
Unit in the 1997 Private Placement for $25,000. Accordingly, the Company was
indebted to Mr. Ball in the amount of $10,000, pursuant to the terms of the
1997 Private Placement. In addition, Mr. Ball purchased an additional $60,000
of Notes issued in the 1997 Private Placement from the Company. All such Notes
were converted into an aggregate of 140,000 shares of Common Stock and Private
Placement Warrants to purchase 210,000 shares of Common Stock on December 4,
1998. Mr. Ball agreed, for a period of one year, not to sell or otherwise
dispose of securities received upon conversion of the Notes held by him without
the Company consent.
On December 2, 1998, Michael M. Schiffman, President of the Company,
purchased $50,000 of the Notes issued in the 1997 Private Placement from the
Company. All such Notes were converted into and aggregate of 100,000 shares of
Common Stock and Private Placement Warrants to purchase 150,000 shares of
Common Stock on December 4, 1998. Mr. Schiffman agreed, for a period of one
year, not to sell or otherwise dispose of securities received upon conversion
of the Notes held by him without the Company's consent.
On December 2, 1998, Philip B. Kart, Chief Financial Officer of the
Company, purchased $20,000 of the Notes issued in the 1997 Private Placement
from the Company. All such Notes were converted into an aggregate of 40,000
shares of Common Stock and Private Placement Warrants to purchase 60,000 shares
of Common Stock on December 4, 1998. Mr. Kart agreed, for a period of one year,
not to sell or otherwise dispose of securities received upon conversion of the
Notes held by him without the Company's consent.
In July and December 1997, Robert S. Ellin and related investors
purchased an aggregate of 5.6 Units in the 1997 Private Placement. On August
11, 1998, Mr. Ellin purchased one half Unit in a privately negotiated
transaction for $22,500.
On December 2, 1998, (i) Nancy J. Ellin, the wife of Mr. Ellin,
purchased for $55,000 principal amount of Notes from the Company which
converted into 110,000 shares of Common Stock and Private Placement Warrants to
purchase 165,000 shares of Common Stock and (ii) the Robert Ellin Profit
Sharing Plan purchased for $45,000 principal amount of Notes from the Company
which converted into an aggregate of 90,000 shares of Common Stock and Private
Placement Warrants to purchase 135,000 shares of Common Stock. Such investors
agreed, for a period of one year, not to sell or otherwise dispose of
securities received upon conversion of the Notes held by him and related
investors of which he is beneficial owner, without the Company's consent.
Mr. Ellin is currently in negotiations with the Company concerning his
becoming a consultant to the Company; however, the Company and Mr. Ellin have
not reached any agreement as to any such consulting agreement and there can be
no assurance that any such agreement will be reached. In November 1998, Mr.
Ellin received a fee of $40,000 in connection with his recruitment of Jerome E.
Ball as the Company's Chief Executive Officer.
On September 1, 1995, the Company borrowed $100,000 from Carl Waldman,
uncle of Theodore H. Schiffman, for a term of five years pursuant to a
promissory note bearing interest at 10% per annum, of which $42,670 is
currently outstanding.
The Company has incurred indebtedness created in connection with
letters of credit extended for the benefit of the Company by a corporation
controlled by the spouse of Cheryl Fenster Fishoff. The Company pays such
corporation a commission of 5% of the amount of the letters of credit, together
with expenses related to opening and collection of such letters of credit, and
interest on the open balances thereof at 1.5% over the prime rate of the
issuing bank. At September 30, 1998, no indebtedness was outstanding. During
Fiscal 1998, the Company incurred interest on open letters of credit in the
amount of $14,500.
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<PAGE>
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2. PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LITIGATION OR SUCCESSION
(a) Agreement dated June 9, 1994, between the Company and
Northeast Looseleaf, Inc. and amendment thereto (incorporated
herein by reference to Exhibit 6(i) to the Company's Form
10-SB Registration Statement ("Form 10-SB"))
(a)(1) Settlement Agreement dated December 27, 1995, between the
Company and Northeast Looseleaf, Inc. et al. (Incorporated
herein by reference to Exhibit 2(a)(1) to the Company's Form
10-KSB for the fiscal year ended September 30, 1995)
(b) Agreement dated as of April 24, 1995 between the Company and
Republic Clear-Thru Acquisition Corp. (incorporated herein by
reference to Exhibit 1 to the Company's Form 8-K Report dated
April 27, 1995)
3. ARTICLES OF INCORPORATION AND BY-LAWS
(a) Certificate of Incorporation of the Company as amended
(incorporated by reference to Exhibit 2(a) to the Form 10-SB)
(b) By-Laws (incorporated by reference to Exhibit 2(b) to the
Form 10-SB)
(c) Amendment to By-Laws (Article I, Section 2) (incorporated
by reference to Exhibit 3(c) to the Company's Registration
Statement on Form SB-2 filed November 13, 1995 (Reg.
No. 33-99338) (the "1995 SB-2 Registration Statement")
(d) Certificate of Amendment of Certificate of Incorporation
filed by the New York Department of State on August 22,
1997.(Incorporated by reference to the Company's Annual
Report on Form 10-KSB for the period ended September 30,
1997)
4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS
(a) Form of Subscription Agreement executed in connection with
1997 Private Placement November - December, 1994 (transfer
restriction) (incorporated by reference to Exhibit 3(a) to
the Form 10-SB)
(b) Warrant Agreement dated October 20, 1994 between the Company
and Mellon Securities Trust Company, including forms of Class
A Warrant and Class B Warrant (incorporated by reference to
Exhibit 3(b) to the Form 10-SB)
(c) Consulting Agreement dated September 26, 1994 between the
Company and CWAI Consultants Corp., including form of
Warrant; Amendment thereto dated October 13, 1994
(incorporated by reference to Exhibit 3(c) to the Form 10-SB)
(c)(1) Amendment No. 2 to CWAI Consultants Corp. Warrant
(incorporated by reference to Exhibit 2 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended
March 31, 1995)
(c)(2) Restated and Amended CWAI Consultants Corp. Warrant dated
November 6, 1995 (incorporated by reference to Exhibit 4(c)(2)
to the 1995 SB-2 Registration Statement)
(c)(3) CWAI Consultants Corp. Warrant dated December 11, 1995,
superseding the Restated and Amended Warrant filed as Exhibit
(c)(2) (Incorporated herein by reference to Exhibit 4(c)(3)
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<PAGE>
to the Company's Annual Report on Form 10-KSB for the fiscal
year each September 30, 1995.)
(d) Business Loan Agreement dated November 9, 1989 between Koszegi
Industries, Inc. ("Koszegi") and 1st Source Bank ("Bank")
(without exhibits) (incorporated by reference to Exhibit 3(d)
to the Form 10-SB)
(e) Security Agreement dated November 9, 1989 from Koszegi to
Bank (incorporated by reference to Exhibit 3(f) to the Form
10-SB)
(f) Letter from Bank to Koszegi dated November 9, 1989
(incorporated by reference to Exhibit 3(g) to the Form 10-SB)
(g) Subordination of Liens Agreement dated October 30, 1989
between Bank Leumi Trust Company of New York and Bank, with
First, Second and Third Amendments thereto (incorporated by
reference to Exhibit 3(h) to the Form 10-SB)
(h) Real Estate Mortgage and Security Agreement dated September
7, 1990 between Koszegi and Bank (incorporated by reference
to Exhibit 3(j) to the Form 10-SB)
(i) General Loan Agreement dated August 30, 1991 between Koszegi
and Bank (incorporated by reference to Exhibit 3(k) to the
Form 10-SB)
(j) Amendment thereto dated June 30, 1994 (incorporated by
reference to Exhibit 3(l) to the Form 10-SB)
(k) Term Promissory Note of Koszegi dated August 30, 1991 to Bank
in original principal amount of $400,000 (incorporated by
reference to Exhibit 3(m) to the Form 10-SB)
(l) Subordination of Debt Agreement dated August 30, 1991 between
Koszegi and Bank (incorporated by reference to Exhibit 3(n)
to the Form 10-SB)
(m) Security Agreement dated August 30, 1991, from Koszegi to
Bank (incorporated by reference to Exhibit 3(o) to the Form
10-SB)
(n) Continuing Guaranty of Payment dated August 30, 1991, from
the Company to Bank (incorporated by reference to Exhibit
3(p) to the Form 10-SB)
(o) Term Promissory Note of Koszegi dated June 30, 1994 in
principal amount of $200,000 (incorporated by reference to
Exhibit 3(q) to the Form 10-SB)
(p) Letter of Understanding and Agreement to Pledge dates June
30, 1994 among Koszegi, the Company, Theodore Schiffman and
Bank (incorporated by reference to Exhibit 3(r) to the Form
10-SB)
(q) First Mortgage Note dated May 9, 1989 of the Company to the
Greater New York Savings Bank in the principal amount of $1.2
million (incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1989)
(r) First Mortgage and Security Agreement dated May 9, 1989 of
the Company to the Greater New York Savings Bank
(incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1989)
(s) Revolving Promissory Note of Koszegi dated May 23, 1995 to
Bank in principal amount of $750,000, maturing January 31,
1996 (incorporated by reference to Exhibit l(a) to the
Company's Quarterly Report on Form 10-QSB for the quarter
ended June 30, 1995)
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<PAGE>
(t) Revolving Promissory Note of Koszegi dated July 3, 1995 to
Bank in principal amount of $350,000, maturing January 31,
1996 (incorporated by reference to Exhibit l(b) to the
Company's Quarterly Report on Form 10-QSB for the quarter
ended June 30, 1995)
(u) Term Promissory Note of Koszegi dates June 14, 1995 to Bank
in principal amount of $300,000, maturing June 15, 1998
(incorporated by reference to Exhibit l(c) to the Company's
Quarterly Report on Form 10-QSB for the quarter ended June
30, 1995)
(v) Security Agreement dated June 14, 1995 between the Company
and 1st Source Bank (incorporated by reference to Exhibit
l(d) to the Company's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 1995)
(w) Consulting Agreement dated as of February 21, 1995 between
the Company and Michael Klein, including form of Warrant
(incorporated by reference to Exhibit 3(bb) to the Form
10-SB)
(x) Convertible Note of the Company dated as of September 11,
1995, to Cheryl Fenster Fishoff in the principal amount of
$400,000 (incorporated by reference to Exhibit 4(x) to the
1995 SB-2 Registration Statement)
(y) Convertible Note of the Company dated December 19, 1995, to
Cheryl Fenster Fishoff in the principal amount of $157,200
(incorporated by reference to Exhibit 4(y) to the Company's
Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1995)
(z) Revolving Promissory Note of Koszegi dated January 31, 1996
to 1st Source Bank in principal amount of $750,000 maturing
March 30, 1996 (incorporated by reference to Exhibit 1(a) the
Company's Quarterly Report on Form 10-QSB for the quarter
ended December 31, 1995)
(aa) Revolving Promissory Note of Koszegi dated January 31, 1996
to 1st Source Bank in principal amount of $350,000 maturing
March 30, 1996 (incorporated by reference to Exhibit 1(b) to
the Company's Quarterly Report on Form 10-QSB for the period
ended December 31, 1995)
(bb) Convertible Note of the Company dated as of October 25, 1996,
to Cliveden Capital Offshore Fund, Ltd. In the principal
amount of $150,000 (incorporated by reference to Exhibit
4(bb) to the Company's Annual Report on Form 10-KSB for the
period ended September 30, 1996)
(cc) Form of Registration Rights Agreement executed in connection
with 1997 Private Placement. (incorporated by reference to
Exhibit 4.3 to the Company's Registration Statement on
Form S-3 as filed with the Commission on December 9, 1997)
(dd) Form of Convertible Promissory Note executed in connection
with 1997 Private Placement (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form
S-3 as filed with the Commission on December 9, 1997)
(ee) Form of Warrant executed in connection with 1997 Private
Placement. (incorporated by reference to Exhibit 4.2 to the
Company's Registration Statement on Form S-3 as filed with the
Commission on December 9, 1997)
(ff) Business Loan and Security Agreement dated April 13, 1998
between Forward Industries, Inc., Koszegi Industries, Inc.
and Summit Bank (without exhibits).(incorporated by reference
to the Company's Current Report on Form 8-K filed with the
Commission on May 12, 1998)
-30-
<PAGE>
* Filed herewith
9. VOTING TRUST AGREEMENT - Not applicable
10. MATERIAL CONTRACTS
(a) Lease, dated March 28, 1989 between Janice Corson as
landlord, and Koszegi Industries, Inc. (formerly KP
Industries, Inc.) as tenant, with Guarantee of the Company
(incorporated by reference to the Company's Current Report on
Form 8-K filed with the Commission on April 11, 1989)
(b) Employment Agreement dated October 1, 1994 between the
Company and Theodore H. Schiffman (incorporated by reference
to Exhibit 6(d) to the Form 10-SB)
(c) Employment Agreement dated November 1, 1994 between the
Company and Michael Schiffman (incorporated by reference to
Exhibit 6(e) to the Form 10-SB)
(d) Stock Option Agreement dated October 12, 1994 between the
Company and Theodore H. Schiffman (incorporated by reference
to Exhibit 6(f) to the Form 10-SB)
(e) Stock Option Agreement dated October 12, 1994 between the
Company and Michael Schiffman (incorporated by reference to
Exhibit 6(g) to the Form 10-SB)
(f) Agreement dated January 19, 1994 with Inter-Ocean Industries,
Inc. re: letters of credit (incorporated by reference to
Exhibit 6(h) to the Form 10-SB)
(g) Placement Agent Agreement dated October 20, 1994 between the
Company and Brookehill Equities, Inc. (incorporated by
reference to Exhibit 6(j) to the Form 10-SB)
(h) Consulting Agreement dated October 31, 1989 between HSI
Acquisition, Inc. (a subsidiary of the Company since merged
into the Company) and Mentel Shemtov (incorporated by
reference to Exhibit 6(k) to the Form 10-SB)
(i) Lease Termination Agreement dated August 14, 1995 between REA
Realty Co. and the Company (incorporated by reference to
Exhibit 10(i) to the 1995 SB-2 Registration Statement)
(j)(1) Employment Agreement dated October 14, 1996 between the
Company and William E. Mooar (incorporated by reference to
Exhibit 1 to the Company's Current Report on Form 8-K dated
October 14, 1996)
(j)(2) Amendment No. 1 to the Employment Agreement between the
Company and William Mooar (incorporated by reference to
Exhibit 10(j)(2) to the Company's Annual Report on Form
10-KSB for the period ended September 30, 1996)
(k) Employment Agreement dated October 1, 1997 between the
Company and Theodore H. Schiffman (incorporated by reference
to Exhibit 10(k) to the Company's Annual Report on Form
10-KSB for the period ended September 30, 1997)
(l) Employment Agreement dated November 1, 1997 between the
Company and Michael Schiffman (incorporated by reference to
Exhibit 10(l) to the Company's Annual Report on Form 10-KSB
for the period ended September 30, 1997)
-31-
<PAGE>
(m) Security Agreement dated September 30, 1997 between Koszegi
and Amplaco Group, Inc., ("Amplaco") (incorporated by
reference to Exhibit 10(m) to the Company's Annual Report on
Form 10-KSB for the period ended September 30, 1997)
(n) Subordination Agreement and Assignment executed by Koszegi
and delivered to The Bank of New York for the benefit of
Amplaco, dated September 30, 1997(incorporated by reference
to Exhibit 10(n) to the Company's Annual Report on Form
10-KSB for the period ended September 3, 1997)
(o) Agreement of Sublease between Koszegi and Amplaco dated
September 30, 1997 (incorporated by reference to Exhibit
10(o) to the Company's Annual Report on Form 10-KSB for the
period ended September 30, 1997)
(p) License Agreement between Koszegi and Amplaco dated September
30, 1997 (incorporated by reference to Exhibit 10(p) to the
Company's Annual Report on Form 10-KSB for the period ended
September 30, 1997)
(q) Asset Purchase Agreement between Koszegi and Amplaco, dated
September 30, 1997 (incorporated by reference to Exhibit
10(q) to the Company's Annual Report on Form 10-KSB for the
period ended September 30, 1997)
(r) Amendment, dated November 6, 1997 to Warrant Agreement dated
as of October 20, 1994 Between the Company and Chase Mellon
Shareholder Services (f/k/a Mellon Securities Trust Company)
(incorporated by reference to Exhibit 10(r) to the Company's
Annual Report on Form 10-KSB for the period ended September
30, 1997)
(s) Amendment, dated December 18, 1997 to Warrant Agreement dated
as of October 20, 1994 Between the Company and Chase Mellon
Shareholder Services (f/k/a Mellon Securities Trust Company)
(incorporated by reference to Exhibit 10(s) to the Company's
Annual Report on Form 10-KSB for the period ended September
30, 1997)
(t) Agreement between the Company, Koszegi and MedCovers, Inc.
dated July 31, 1998 regarding contract-manufacturing services
to be provided by MedCovers, Inc. and for the purchase of
certain assets of Koszegi*
(u) Employment Agreement effective as of October 1, 1998 between
the Company and Jerome E. Ball.*
(v) Consulting Agreement effective as of October 1, 1998 between
the Company and Theodore H. Schiffman.*
(w) Employment Agreement effective as of October 1, 1998, between
the Company and Michael Schiffman.*
* Filed herewith
11. STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS - Not required since
such computation can be clearly determined from the material contained
in this report on Form 10-KSB
13. ANNUAL REPORT TO SECURITY HOLDERS FOR THE LAST FISCAL YEAR, FORM 10-Q OR
10-QSB OR QUARTERLY REPORT TO SECURITY HOLDERS, IF INCORPORATED BY
REFERENCE IN THE FILING - Not applicable
-32-
<PAGE>
16. LETTER ON CHANGE IN CERTIFYING ACCOUNTANT - Incorporated by reference to
Exhibit 16.1 to the Company's Current Report on Form 8-K dated June 9,
1997
18. LETTER ON CHANGE IN ACCOUNTING PRINCIPLES - Not applicable
21. SUBSIDIARIES OF THE SMALL BUSINESS ISSUER (incorporated by reference to
Exhibit 21 to the Company's Annual Report on Form 10-KSB for the fiscal
year ended September 30, 1995)
22. PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO VOTE OF SECURITY HOLDERS -
Not applicable
24. POWER OF ATTORNEY - Not applicable
28. INFORMATION FROM REPORTS FURNISHED TO STATE INSURANCE REGULATORY
AUTHORITIES - Not applicable
99. ADDITIONAL EXHIBITS - Not applicable
-33-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
hereunto duly authorized.
Dated: December 23, 1998 FORWARD INDUSTRIES, INC.
By: /s/ Jerome E. Ball
----------------------------------
Jerome E. Ball
Chief Executive Officer, and
Vice Chairman of the Board
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated:
December 23, 1998 /s/ Jerome E. Ball
--------------------------------------
Jerome E. Ball
Chief Executive Officer, and
Vice Chairman of the Board
(Principal Executive Officer)
December 23, 1998 /s/ Philip B. Kart
--------------------------------------
Philip B. Kart
Chief Financial Officer and Vice President
(Principal Financial Officer and
Principal Accounting Officer)
December 23, 1998 /s/ Theodore H. Schiffman
--------------------------------------
Theodore H. Schiffman
Chairman of the Board
December 23, 1998 /s/ Michael Schiffman
--------------------------------------
Michael Schiffman
President and Director
December 23, 1998 /s/ Noah Fleschner
--------------------------------------
Noah Fleschner
Director
December 23, 1998 /s/ Samson Helfgott
--------------------------------------
Samson Helfgott
Director
-34-
<PAGE>
EXHIBIT 10(t)
STATE OF NORTH CAROLINA
WAKE COUNTY
MEMORANDUM OF AGREEMENT
THIS AGREEMENT is entered into between Med Covers, Inc., a North Carolina
Corporation ("Med Covers") and Koszegi Industries, Inc., an Indiana Corporation
and its parent company, Forward Industries, Inc., jointly and severally, and
collectively referred to herein as "Koszegi."
SUMMARY: Med Covers and Koszegi are manufacturers, distributors, and sellers of
products used to carry and protect equipment and other products. Koszegi is
phasing out US production of certain items in its product line and it is the
intent that Med Covers shall manufacture these items in its existing facilities
in North Carolina for resale by Koszegi. Koszegi has resources related to its
current manufacturing which will no longer be required when this takes place,
some of which Med Covers shall acquire. This memorandum sets out the basic
terms of the cooperation between the parties.
MANUFACTURING
1. Med Covers shall manufacture and Koszegi shall purchase those products
required by Koszegi and of a type presently produced by Koszegi's
production plant in the United States, in such quantities as Koszegi may
determine it requires. Products, pricing, and quantities shall be
established for various products on a reasonable basis, it being the intent
that Med Covers provide manufacturing capability to replace Koszegi's
present production. Notwithstanding, Med Covers shall not be required to
accept orders to produce any product in quantities beyond its reasonable
capabilities, nor shall Koszegi be required to purchase products if
Medcovers is unable to meet specific requirements of price, requested
delivery date or production capability for that order. Where material or
labor costing assumptions provided by Koszegi have been used by Med Covers
to establish its prices, and said assumptions are subsequently determined
to have been clearly erroneous, Med Covers reserves the right to adjust
pricing on future orders of the same product, or future releases against a
blanket purchase order, to the extent of necessary adjustments. Except as
otherwise provided in this paragraph, acceptance of an order by Medcovers
shall be deemed acceptance of the price and terms relating to that order.
2. Quality shall be equivalent to that of products presently produced by
Koszegi in its own facilities. Koszegi may provide, at its discretion and
expense, a person having
<PAGE>
quality control experience to reasonably monitor production at the Med
Covers Kenly, N.C., facility and to coordinate quality control matters with
Med Covers production personnel for their mutual interest in maintaining
customer satisfaction and minimizing rejected or otherwise unsatisfactory
products. Each party may report to the other's management any quality
control issues not reasonably resolved and which require management
involvement. It is understood that Koszegi's quality control coordinator
shall have neither responsibility for, nor authority to, direct the
activities of Med Covers employees. If Koszegi has employed an on-site
quality control representative, then the representative must sign off on a
sample production for any project before Med Covers begins full production.
Med Covers may not change the design, appearance, or materials used without
a new signed-off sample approved or written approval from Koszegi. When a
shipment has been approved by the Koszegi representative, that shipment
shall be deemed to have met Koszegi standards. However, Med Covers shall
continue to be responsible for manufacturing defects of individual items
within that shipment.
3. Unless otherwise agreed, Med Covers shall not be required to maintain
inventory of any products, and shall be entitled to invoice all product
orders when completed, taking into account requested shipping dates.
Notwithstanding, Med Covers shall be entitled to rely on purchase orders
for deferred shipping dates to develop economical production runs, and may
produce product in advance which it shall hold at its own expense until the
shipping date shown on the purchase order.
4. It is recognized that for purposes of marketing and customer relations,
Koszegi desires that the manufacturing of its products by Med Covers not be
publicized or disclosed except as may be required by law. Med Covers shall
take reasonable steps to use Koszegi labeling, packaging materials, and
documentation separate from its own. However, Med Covers shall not be
liable to Koszegi for any disclosures unless arising out of gross
negligence or wilful or wanton acts of Med Covers management personnel. Med
Covers shall not be required to give false information to any party, or
omit information concerning its manufacture of product where to do so would
expose Med Covers to criminal or civil liability.
5. Payment terms shall be net 30 days from invoice date, 2% discount if paid
within 10 days, unless otherwise agreed. Failure to pay invoices overdue by
at least 15 days shall result in a late charge of 1.5% per month on the
outstanding balance. For purposes of this paragraph, payment dates shall be
calculated based on the date payment is received by Med Covers. If
collection actions are commenced in respect of
<PAGE>
unpaid balances, Med Covers shall be entitled to court costs and reasonable
attorney fees up to the maximum amount allowed by law.
6. In the event that Med Covers makes a separate charge for design, creating
patterns, or making tools or dies for specific products, then the patterns,
tools or dies shall become the property of Koszegi. Any patterns, tools or
dies provided to Med Covers by Koszegi shall remain the property of
Koszegi. Otherwise, all designs, patterns, tools or dies shall remain the
property of Med Covers. Any software or other digital files relating to
design or production of products shall also be subject to any restrictions
imposed by the owner or licensor of the software used to prepare said
files, including but not limited to the requirement that Koszegi obtain at
its own expense software licenses necessary to use the specific data files
to be provided by Med Covers. Except as otherwise provided in this
paragraph, any and all design work carried out by Med Covers shall be
deemed for the purposes of carrying out its manufacturing obligations under
this agreement and shall not be deemed "work for hire."
7. Each part acknowledges that to carry out the production provided for in
this agreement, disclosure of business and technical information which has
actual and potential commercial value may be required, including but not
limited to customer and prospect names and lists, design, pricing, and
costing information not being generally known. In order that its
confidential and proprietary information may be protected, each party
promises to the other that it and its personnel will not, during the term
of the Agreement and for a period of three (3) years thereafter (regardless
of the reason for the termination of the Agreement):
a. Med Covers shall not solicit for orders, accept orders from or service
any customer of Koszegi in respect of products manufactured by Med
Covers for Koszegi during the term of this agreement;
b. Koszegi shall not solicit for orders, accept orders from, or service
any customers or prospects of Med Covers in respect of products
manufactured by Med Covers in its own name, during the term of the
Agreement;
c. Disclose to any individual, firm, association, corporation, or other
enterprise, nor use for one party's own benefit, any business, trade,
financial, customer, product or sales information which shall become
known to the other in the course of carrying out the obligations under
this Agreement, such information being deemed
<PAGE>
confidential to the extent not known generally in the trade.
Each acknowledges that the remedies at law for the breach of any of the
promises contained in this paragraph shall be deemed inadequate and that
either party shall be entitled to injunctive relief for any such breach.
8. Product warranties for accepted goods are limited to repair or replacement
of products arising out of defects in materials or workmanship. All other
warranties are disclaimed and excluded, including but not limited, to
express or implied warranties of merchantability and express or implied
warranties of fitness for a particular purpose. Koszegi shall not extend to
any third party, by express terms or implication, any warranty excluded
under this paragraph, and shall indemnify and hold Med Covers harmless from
any and all claims arising therefrom, including but not limited to court
costs and attorney fees. Med Covers shall accept return for credit of
products which Koszegi or its customers have rejected, consistent with
applicable Uniform Commercial Code provisions, for failure to meet quality
requirements.
RESOURCES -- TANGIBLE ASSETS
9. Upon the transition of production of any product or products from Koszegi
to Med Covers, Koszegi shall ship to Med Covers at its expense its
remaining inventory of materials used in the manufacture of those products
to be manufactured by Med Covers. Med Covers shall not be obligated to
purchase this inventory until required for firm orders placed by Koszegi,
but Med Covers shall endeavor to use Koszegi inventory before purchasing
similar inventory elsewhere. All inventory shall be sold at the lower of
cost or market, taking into account any variations in shipping costs to
produce a cost delivered Kenly, N.C., not greater than Med Covers could
obtain from a regular supplier of that material. Provided that Koszegi has
paid all amounts due Med Covers, Med Covers shall remit to Koszegi the
appropriate payment for inventory used not later than the 10th of the
following month.
10. Koszegi shall deliver to Med Covers at its facility all patterns, tools and
dies used for production of products which Med Covers is to manufacture for
Koszegi. Koszegi shall retain ownership of these resources.
11. Med Covers shall select and purchase certain production machinery and
equipment owned by Koszegi located in its South Bend, Indiana, facility,
provided that Med Covers shall select and purchase at least $200,000
thereof based on prices as
<PAGE>
determined below. Once Med Covers has completed its selection, Koszegi
shall maintain the equipment in substantially the same condition as on the
date of selection, and the machinery and equipment selected shall comprise
a complete package from which items may not be deleted or substituted
without the consent of both parties. Pricing shall be as agreed not to
exceed appraised orderly liquidation value prices as shown on the Accuval
appraisal dated April 7, 1998, copy attached hereto as Exhibit "A", and
includes disassembly, packing, and shipping to the appropriate Med Covers
facility. Risk of loss or damage remains with Koszegi until received by Med
Covers.
Koszegi shall provide a bill of sale with warranties of title to Med
Covers, and shall provide releases or termination of any security
interests, UCC filings, and the like, if any, which may affect title to the
equipment, provided that the obligation to pay for the machinery and
equipment shall be secured by such machinery and equipment, and Med Covers
hereby grants Koszegi a security interest therein and agrees to cooperate
with Koszegi in filing required UCC-1's thereon and taking all action
necessary to maintain a perfected first lien thereon until the purchase
price therefor is paid. The parties agree to promptly execute a separate
security agreement containing standard provisions and such other documents
as may be required to perfect the security interest as set out herein. No
payment shall be due for the first 6 months after final shipment of the
equipment. Thereafter, payment shall be based upon Med Covers invoices of
products purchased by Koszegi at the rate of 3% on the first $150,000.00 of
products invoiced per month by Med Covers, 4.5% of the next $50,000.00 and
6% on all amounts in excess of $200,000.00 until the outstanding balance
has been paid in full. Provided that Koszegi has paid the qualifying
invoices according to terms as set out herein, Med Covers shall remit to
Koszegi the appropriate payment not later than the 10th of the following
month. However, if after 36 months this Agreement has expired and not been
renewed, or if this agreement is terminated pursuant to Paragraph 17, then
any outstanding balances shall be due. In this event, Med Covers shall
either pay all outstanding balances in full or elect to amortize the
remaining balance over 18 months in 18 equal payments bearing interest at
8% per annum and shall sign a promissory note(s) to this effect.
RESOURCES -- PERSONNEL
12. Koszegi shall provide to Med Covers relevant employment details of
important management and operational employees, excluding sales and service
personnel. Prior to Koszegi giving notice of termination to any of these
employees, Med Covers
<PAGE>
shall be given to the opportunity to approach and offer employment to any
employees it considers desirable for its operations in North Carolina.
Koszegi shall be supportive of Med Covers efforts in this regard. However,
Med Covers shall not be under obligation to offer employment to any Koszegi
employee, and Koszegi shall make no representations concerning the terms
and conditions of any position which Med Covers may offer except with the
express consent of Med Covers. Unless specifically offered by Med Covers to
a specific employee, neither party shall make any representations to an
employee, express or implied, that relocating to North Carolina should be
deemed an inducement to enter into an employment contract or in any other
way to modify the common law relationship of employment at will.
GENERAL CONDITIONS
13. Koszegi and Med Covers are independent parties, and the relationship is
that of a buyer and a seller of goods. The relationship does not create a
general agency. Neither has authority to bind the other in any relationship
to third parties.
14. The prices of all products shown sold by Med Covers to Koszegi are in U.S.
dollars, F.O.B. factory. Koszegi shall submit purchase orders for
acceptance by Med Covers at its offices in Raleigh, North Carolina. Unless
otherwise agreed, Med Covers shall ship, F.O.B. Kenly, North Carolina, when
production is completed.
15. Each party acknowledges the others ownership of all patents and trademarks
pertaining to its products and that it will acquire no interest in such
intellectual property rights by reason of this agreement.
16. Subject to the provisions for termination as hereinafter provided, the term
of the Agreement, as amended from time to time, shall begin on the date of
execution of this Agreement and shall expire three years thereafter unless
renewed in writing signed by both parties not less than 180 days prior to
the expiration date.
17. Upon failure of a party to substantially comply with this agreement,
including, but not limited to, timely payment of moneys owed to the other,
either party may terminate the Agreement after giving sixty (60) days
written notice to the other of the intent to terminate for cause, after
setting out, with particularity, the basis for the termination, and the
other party not having cured the ground(s) for the noticed termination
within forty-five days after the notice having
<PAGE>
been given. The parties shall deal with each other in good faith during the
sixty (60) day period after any notice to terminate has been given.
Notwithstanding, Med Covers shall be under no obligation to manufacture or
ship any products if payment for prior shipments remain outstanding past
their due date. Remedies under this paragraph shall be in addition to any
other remedies available to the other under prevailing law.
18. Any notice required or permitted to be given under the Agreement shall be
sufficient if in writing, and if sent by registered mail to the principal
office of the party being noticed.
19. The Agreement shall be binding upon and shall inure to the benefit of the
parties, their respective representatives, successors and assigns. This
Agreement shall not be assigned without the written consent of the other
parties, such consent not to be unreasonably withheld.
20. The Agreement shall be deemed to express, embody and supersede all previous
understandings, agreements and commitments, whether written or oral,
between the parties with respect to the subject matter hereof and to fully
and finally set forth the entire agreement between the parties. No
modifications shall be binding unless stated in writing and signed by both
parties.
21. The Agreement shall be governed by the laws of the State of North Carolina
including the applicable provisions of the Uniform Commercial Code -- Sales
except where in conflict with the specific terms of this Agreement. All
purchases of product by Koszegi shall be deemed to take place in Raleigh,
Wake County, North Carolina, regardless of the originating point of the
order or where shipment takes place.
22. Any controversy or claim arising out of related to this Agreement, or
breach thereof, shall be settled by arbitration in accordance with the
Commercial Rules of the American Arbitration Association and judgment upon
the award rendered by the arbitrator or arbitrators may be entered in any
court having jurisdiction thereof. Any award in arbitration may include
attorney fees to the prevailing party. During any period of arbitration,
the parties hereto shall otherwise perform its duties and obligations under
the terms of this Agreement until settlement of such arbitration.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement in triplicate
originals effective , 1998.
Med Covers, Inc.
By: /s/ Title: C.E.O.
------------------------------- -----------------------------------
(CORPORATE SEAL)
ATTEST: /s/ Jack Van Schoor
---------------------------
7/31/98 Secretary
Koszegi Industries, Inc.
By: Title:
------------------------------- -----------------------------------
(CORPORATE SEAL)
ATTEST:
-----------------------
Secretary
Forward Industries, Inc.
By: Title:
------------------------------- -----------------------------------
(CORPORATE SEAL)
ATTEST:
-----------------------
Secretary
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT effective as of October 1,1998 between Forward Industries, Inc.,
a New York corporation with offices at 400 Post Avenue, Westbury, New York
11590 (the "Company"), and Jerome Ball residing at 300 East 56th Street, New
York, New York 10022 ("Executive").
W I T N E S S E T H:
WHEREAS, the Company desires to employ Executive to perform senior
executive and other services for the Company, and Executive desires to accept
such employment, all on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and other good and valuable consideration, the receipt of which the parties
acknowledge, the parties agree as follows:
Employment and Duties
The Company hereby employs Executive for the term of this Agreement
and Executive hereby accepts such employment as the Vice Chairman and Chief
Executive Officer of the Company for the first six months of the term and
Chairman and Chief Executive Officer for the remainder of the term on the terms
and conditions set forth in this Agreement.
1. Employment Term
Unless terminated at an earlier date pursuant to the terms of this
Agreement, the term of employment hereunder (the "Employment Term") shall be
two (2) years, commencing on the date hereof (the "Commencement Date").
<PAGE>
2. Services
a. Executive shall perform such duties of a senior executive nature
for the Company, as shall be consistent with the provisions of the Company's
By-laws in effect on the date hereof, subject to the direction of the Board of
Directors of the Company (the "Board"). Executive shall serve the Company
faithfully and to the best of his ability and shall devote his full business
time and attention to the affairs of the Company, subject to reasonable
absences for vacation and illness as determined by the Board.
b. The headquarters for the performance of Executive's services during
the term of this Agreement shall be the principal executive offices of the
Company in Westbury, New York, unless otherwise agreed by the Company and
Executive and subject to such reasonable travel in the performance of
Executive's duties as the business of the Company may require.
3. Compensation and Expense Reimbursement
a. Salary. Executive shall be entitled to receive for all services
rendered by Executive in any capacity, an annual salary at the rate of $201,600
(payable in equal installments in accordance with the then prevailing practices
of the Company, but in no event less frequently than monthly), subject to
adjustment upon terms agreed upon by the Company and Executive.
b. Bonus. The Executive shall receive a bonus with respect to each
full fiscal year ended during the Employment Term equal to ten percent (10%) of
the pre-tax operating profit (if any) of the Company above $675,000 as shown in
its audited financial statements for each such fiscal year.
-2-
<PAGE>
In addition, as further inducement to Executive to serve as Chief
Executive Officer of the Company, upon execution of this Agreement, Executive
shall receive under the Company's 1996 Stock Incentive Plan (the "Plan")
options to purchase 250,000 shares of common stock, par value $.01 per share
(the "Common Stock"), of the Company at an exercise price of $1.75 per share.
Of such options, options to purchase 125,000 (subject to adjustment for stock
splits and similar events) of such shares of Common Stock shall become
exercisable every six months during the first year of the Employment Period,
provided the Executive is still employed by the Company. Such options shall
expire ten years after the date of grant. However, if this Agreement is
terminated prior to the end of the Employment Term, such options shall expire
two years after the date of termination.
c. Expenses. Executive will be reimbursed for all reasonable and
necessary expenses incurred by Executive in carrying out the duties
contemplated under this Agreement, in accordance with then prevailing Company
procedure, as such practices may be changed from time to time by the Board.
Executive shall be reimbursed for such expenses upon submission of appropriate
documentation. In addition, the Company shall reimburse the Executive for, or
pay for, the expenses for leasing an automobile and parking not to exceed
$1,000 per month.
d. Stock Options. Executive shall be granted options under the Plan to
purchase up to 250,000 shares of Common Stock at an exercise price of $2.00 per
share if the Company's Common Stock price averages $3.50 per share for 180
consecutive days based upon the average reported closing sale prices for the
Company's Common Stock on the Nasdaq Smallcap Market. Such options shall expire
five years after the date of grant, provided the Executive is still
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<PAGE>
employed by the Company. If this Agreement is terminated prior to the end of
the Employment Term, such options shall expire two years after the date of
termination.
e. Benefits. Executive shall be entitled to participate in all group
health and other insurance programs and all other fringe benefit or retirement
plans (including any 401(k) plan) or other compensatory plans which the Company
may hereafter elect to make available to its executives generally on terms no
less favorable than those provided to other executives generally, provided
Executive meets the qualifications therefor, but the Company shall not be
required to establish any such program or plan, except as provided in this
Paragraph 4.
f. Board of Directors. The Executive shall be invited to join the
Company's Board of Directors as Vice Chairman upon the commencement of the
Employment Term and as Chairman following the first six months of the
Employment Term.
4. Termination for Cause
In the event of: (a) fraud against the Company, conviction of a
felony, the intentional disclosure of confidential information (unless required
by applicable law or court or other order), aiding a competitor to the
detriment of the Company, its subsidiaries or affiliates, intentionally
engaging in conduct which brings disrepute or otherwise is damaging to the
reputation of the Company, its subsidiaries or affiliates, performing
competitive services or acting in a competitive capacity for any other person,
firm or corporation without the prior written consent of the Company; or (b)
willful misconduct, gross negligence, prolonged and unexcused absenteeism by
Executive in connection with Executive's employment hereunder, a breach by
Executive of the terms of this Agreement which has a material adverse effect on
the Company, or Executive's willful
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or intentional failure to implement the reasonable business requests or
directions of the Board, the Company shall have the right to give Executive a
termination notice, specifying the nature of the breach or failure. If such
termination notice is given pursuant to clause (a) above, the Employment Term
shall terminate upon the giving of such notice. If such termination notice is
given pursuant to clause (b) above, the Employment Term shall terminate thirty
(30) days after the giving of such notice if the circumstances described in
such notice have not been remedied by Executive within such thirty (30)-day
period. Upon the termination of the Employment Term pursuant to this Paragraph
5, all provisions of this Agreement shall terminate except for the provisions
of Paragraphs 7 and 8. Upon the effective date of termination of the Employment
Term, the Company shall have no further obligation to Executive hereunder,
except for accrued and unpaid salary, and other previously earned, accrued and
unpaid benefits from the Company and its employee benefit plans through the
date of termination.
5. Illness or Incapacity
In the event of any disability, illness or other incapacity which
prevents Executive from performing services as contemplated herein, the
obligation of the Company to pay compensation to Executive shall be reduced to
the extent of any amount received by Executive pursuant to any disability
insurance policy maintained and paid for by the Company. If Executive shall be
incapacitated for more than 120 consecutive days or 180 days in any consecutive
12-month period, the Company shall have the right to terminate this Agreement
upon 10 days' prior written notice with no further liability, except for
accrued and unpaid salary, and other previously earned, accrued and unpaid
benefits from the Company and its employee benefit plans through the date of
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<PAGE>
such termination, provided that such termination shall not prejudice any rights
of Executive under any disability policies being maintained by the Company for
Executive under the terms of this Agreement. Notwithstanding any such
termination, the provisions of Paragraphs 7 and 8 will continue to apply.
6. Death This Agreement shall terminate automatically upon the death of
Executive. In such event, the Company shall pay the estate of Executive, in
addition to any amounts to which Executive's estate would otherwise be entitled
under the Company's retirement plans and group life insurance policy, within 30
days after the date of death, all compensation earned under Paragraph 4 through
the date of death.
7. Non-Competition and Trade Secrets
a. Confidentiality and Work Product. During the term of this Agreement
and thereafter without limitation of time, Executive shall not knowingly
divulge, furnish, or make available to any third person, company, corporation
or other organization (including but not limited to customers, competitors or
government officials), except in the course of performing his duties as an
Executive hereunder or with the Company's prior written consent, trade secrets
or other confidential information concerning the Company, its subsidiaries or
affiliates or the business of any of the foregoing, including without
limitation, confidential methods of operation and organization and confidential
sources of supply and customer lists, but Executive may make disclosures as
required by applicable law or orders without prior written notice to the
Company. For purposes of this Paragraph 7, information shall not be deemed
confidential if it (i) is within the
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public domain, or (ii) becomes publicly known other than through disclosure by
Executive in violation of this provision.
b. Non-Competition. During the Employment Term and for a period of
three (3) years thereafter, Executive agrees not to directly or indirectly,
own, control, manage, operate, participate or invest in, including, but not
limited to, as an officer, director, shareholder, employee, consultant, agent,
or otherwise be connected with, in any manner, any business, enterprise or
venture which is engaged in the business of manufacturing and/or distributing
of carrying cases supplied to the cellular telephone, home medical equipment,
laptop computer, photography, video or audio industries and any other business
engaged in by the Company during the Employment Term, except that nothing in
this subparagraph shall be deemed to prohibit Executive from the acquisition or
holding of, solely as a passive stockholder, not more than one percent (1%) of
the shares or other securities of a publicly-owned corporation if such
securities are traded on a national securities exchange or over the counter.
c. Solicitation. During the Employment Term and for a period of three
(3) years thereafter, Executive agrees not to directly or indirectly solicit,
employ or retain or arrange to have any other person, firm or other entity
solicit, employ, retain, or otherwise participate in the employment or
retention of, any person who is then, or who has been, within the preceding six
(6) months, an employee, technician or engineer of the Company, its
subsidiaries or affiliates.
d. In the event Executive shall violate any provisions of this
Paragraph 7 (which provisions Executive hereby acknowledges are reasonable and
equitable), Executive shall
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no longer be entitled to and hereby waives any and all rights to any
termination payment under this Agreement.
8. Separability
Executive agrees that the provisions of Paragraph 7 hereof constitute
independent and separable covenants, for which Executive is receiving
consideration which shall survive the termination of employment and which shall
be enforceable by the Company notwithstanding any rights or remedies the
Company may have under any other provision hereof.
9. Specific Performance
Executive acknowledges that:
(i) the services to be rendered under the provisions of this Agreement
are of a special character and it would be difficult to replace such services;
(ii) the Company is relying on the covenants contained herein,
including, without limitation, those contained in Paragraph 7 above, as a
material inducement for entering into this Agreement;
(iii) the Company may be damaged if the provisions hereof are not
specifically enforced; and
(iv) the award of monetary damages may not adequately protect the
Company in the event of a breach hereof by Executive.
By virtue thereof, Executive agrees and consents that if Executive
breaches any of the provisions of this Agreement, the Company, in addition to
any other rights and remedies
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<PAGE>
available under this Agreement or otherwise, shall (without any bond or other
security being required and without the necessity of proving monetary damages)
be entitled to a temporary and/or permanent injunction to be issued by a court
of competent jurisdiction restraining Executive from committing or continuing
any violation of this Agreement, or any other appropriate decree of specific
performance. Such remedies shall not be exclusive and shall be in addition to
any other remedy which the Company may have.
10. Miscellaneous
a. Entire Agreement; Amendment. This Agreement constitutes the entire
employment agreement between the parties and may not be modified, amended or
terminated (other than pursuant to the terms hereof) except by a written
instrument executed by the parties hereto. All other agreements between the
parties pertaining to the employment or remuneration of Executive not
specifically contemplated hereby or incorporated or merged herein are
terminated and shall be of no further force or effect.
b. Assignment. This Agreement is not assignable by Executive without
the prior written consent of the Company and any purported assignment by
Executive of Executive's rights and/or obligations under this Agreement shall
be null and void. This Agreement may be assigned by the Company at any time,
upon delivery of written notice to Executive (with Executive's consent, not to
be unreasonably withheld), to any successor to the business of the Company, or
to any subsidiaries or affiliates of the Company. In the event that Executive
does not consent to the assignment of this Agreement, the Company shall have
the right to terminate this
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<PAGE>
Agreement automatically with no further liability, except for accrued and
unpaid salary, and other previously earned, accrued and unpaid benefits from
the Company and its employee benefit plans.
c. Waivers, etc. No waiver of any breach or default hereunder shall be
considered valid unless in writing, and no such waiver shall be deemed a waiver
of any subsequent breach or default of the same or similar nature. The failure
of any party to insist upon strict adherence to any term of this Agreement on
any occasion shall not operate or be construed as a waiver of the right to
insist upon strict adherence to that term or any other term of this Agreement
on that or any other occasion.
d. Provisions Overly Broad. In the event that any term or provision of
this Agreement shall be deemed by a court of competent jurisdiction to be
overly broad in scope, duration or area of applicability, the court considering
the same shall have the power and hereby is authorized and directed to modify
such term or provision to limit such scope, duration or area, or all of them,
so that such term or provision is no longer overly broad and to enforce the
same as so limited. Subject to the foregoing sentence, in the event that any
provision of this Agreement shall be held to be invalid or unenforceable for
any reason, such invalidity or unenforceability shall attach only to such
provision and shall not affect or render invalid or unenforceable any other
provision of this Agreement.
e. Notices. Any notice permitted or required hereunder shall be in
writing and shall be deemed to have been given on the date of delivery or, if
mailed by certified mail, postage prepaid, return receipt requested, documented
overnight courier, or by facsimile transmission, on the date mailed or
transmitted.
(i) If to Executive to:
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<PAGE>
Jerome Ball at his address
set forth in the preamble to this Agreement
(ii) If to the Company to:
the address set forth in the preamble
to this Agreement
Attention: Chairman of the Board
with a copy to:
Squadron, Ellenoff, Plesent & Sheinfeld, LLP
551 Fifth Avenue
New York, New York 10176
Attention: Kenneth R. Koch, Esq.
Telecopy: (212) 697-6686
F. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK GOVERNING CONTRACTS MADE AND TO BE
PERFORMED IN NEW YORK WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES THEREOF.
g. This Agreement shall be binding upon and inure to the benefit of
the parties and their respective heirs, executors, administrators, personal
representatives, successors and permitted assigns.
h. This Agreement may be executed in counterparts, each of which shall
be deemed an original, and each party may become a party hereto by executing a
counterpart hereof. This Agreement and any counterpart so executed shall be
deemed to be one and the same instrument. It shall not be necessary in making
proof of this Agreement or any counterpart hereof to produce or account for any
of the other counterparts.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
EXECUTIVE FORWARD INDUSTRIES, INC.
/s/ Jerome Ball By: /s/ Theodore H. Schiffman
- ----------------------------- -----------------------------
Jerome Ball Name: Theodore H. Schiffman
Title: Chief Executive Officer
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<PAGE>
CONSULTING AGREEMENT
CONSULTING AGREEMENT, effective as of the 1st day of October, 1998,
between FORWARD INDUSTRIES, INC., a New York corporation with offices at 400
Post Avenue, Westbury, New York 11590 (the "Company"), and THEODORE H.
SCHIFFMAN, residing at 124 Broadway, Lawrence, New York 11559 ("Consultant").
Consultant had been rendering services to the Company pursuant to an
employment agreement effective as of September 30, 1997 and expiring September
30, 2000, subject to a five-year consulting period (the "Prior Agreement").
The Company desires to terminate the Prior Agreement and engage
Consultant to perform consulting services for the Company, and Consultant
desires to perform such services, on the terms and conditions hereinafter set
forth.
1. Termination of Prior Agreement
The Prior Agreement is hereby terminated and shall be of no further
force and effect, and the terms and conditions of this Agreement supersede the
terms and conditions of the Prior Agreement. The Company has no remaining
obligations under the Prior Agreement.
2. Services; Term
Consultant hereby agrees to provide his services as a consultant to
the Company with respect to matters relating to the management of the Company
for a period of five (5) years commencing on the date hereof and terminating on
September 30, 2003. The period covered by this Agreement is referred to herein
as the "Term". Consultant shall retain the title of Chairman of the Board for
the first six months of this Agreement and shall be Chairman Emeritus for the
balance of
<PAGE>
the Term. Consultant shall provide the services required of him hereunder as
and when they shall be reasonably requested by the Company.
3. Consulting Fee; Severance Payment
(a) During the Term, the Company shall pay Consultant at the rate of
$200,000 per annum (the "Consulting Fee") (payable in equal installments in
accordance with the then prevailing practices of the Company, but in no event
less frequently than monthly), subject to adjustment upon terms agreed upon by
the Company and Consultant. Payments to Consultant as herein provided shall
constitute payment in full for Consultant's services rendered pursuant to this
Agreement. Without limiting the foregoing, Consultant acknowledges and agrees
that all applicable federal, state and local payroll taxes and other like
charges relating to payments received by Consultant pursuant to this Agreement
are Consultant's sole responsibility. In addition, Consultant shall repay all
outstanding loans due to the Company out of his Consulting Fee during the Term.
(b) In addition, Consultant shall receive a severance payment in
exchange for the termination of the Prior Agreement and for the services to be
rendered hereunder in the amount of $350,000, of which $200,000 is payable on
January 1, 1999 and $150,000 is payable on the 15-month anniversary thereof.
(c) All stock options owned by Consultant shall be repriced at an
exercise price of $1.10 per share as of the date hereof.
4. Benefits
(a) Consultant shall be entitled to participate in any retirement,
disability, medical, pension, profit sharing, group insurance, or any other
plan or arrangement, or in any other benefits now or hereafter generally
available to executives of the Company.
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(b) If the Consultant dies during the Term, the salary provided for in
Paragraph 3(a) will be paid to the end of the month in which the death occurs.
Thereafter, if the Company is the recipient of at least $1,000,000 of insurance
on the life of Consultant, the Company will pay to the Consultant's Widow (the
"Widow") or, if the Consultant's spouse has pre-deceased him, to the
Consultant's estate, a monthly death benefit of $10,000, payable on the first
day of each month during the 10 year period following the date of the
Consultant's death, commencing with the first calendar month following the
month in which the Consultant died; if the Widow dies prior to the end of such
10 year period, then after the Widow's death, such monthly payments will be
made to the Widow's estate for the balance of such 10 year period. If the
Company is not the recipient of at least $1,000,000 of insurance on the life of
the Consultant, such monthly death benefits will be paid for a period of three
years, followed by monthly death benefits of $5,000 for seven years; if the
Widow dies prior to the end of such 10-year period, then, upon the Widow's
death, such payments shall cease. In addition, upon such death of Consultant,
the Company shall procure medical insurance for the Widow comparable to that
received by executives of the Company until she reaches the age of 65. Payments
will be made by mail to the recipient at such address as the recipient may
designate in writing to the Company from time to time.
5. Expenses
(a) The Company shall reimburse Consultant for all reasonable
out-of-pocket expenses for such items of travel, business entertainment and
miscellaneous expenses as may be reasonably incurred by him in connection with
the performance of his services hereunder and in accordance with the prevailing
Company procedure, as such practices may be changed from time to time by the
Board. In addition, in recognition of Consultant's need for an automobile for
business purposes, the Company will provide Consultant during the Term with an
automobile, and shall
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reimburse Consultant, on a dollar for dollar basis, for all reasonable expenses
incurred by Consultant in connection therewith including, without limitation,
all maintenance, repairs, insurance and costs incident thereto, all comparable
to those presently provided to Consultant by the Company.
(b) The Company shall pay the fees and expenses of legal counsel for
Consultant for services rendered in connection with the preparation of this
Agreement.
6. Termination
This Agreement may be terminated prior to the end of the Term by the
Company if (i) Consultant shall willfully commit any act or omit to take any
action in bad faith or to the material detriment of the Company, or (ii)
Consultant shall breach this Agreement in any material respect. In the event
that this Agreement is terminated in accordance with this Paragraph 6, the
Company shall have no further obligation to Consultant under this Agreement
after the date of such termination, except that Consultant shall be entitled to
receive any consideration to which he is entitled pursuant to Paragraph 3
thereof which has accrued and has not been paid up to and including the date of
termination. Consultant's death or incapacity at any time during the Term to
render such consulting services hereunder or death will not affect the
Company's obligation to pay compensation pursuant to Section 3 hereof,
provided, however, the Company may, at its option, purchase insurance to cover
the costs of such obligations. Notwithstanding anything to the contrary
contained in Section 2 above, Consultant shall not be required to attend at the
Company's offices in Westbury, New York or at any other place designated by the
Company in order to be entitled to any consultive compensation, and Consultant
may, at his sole option, render any such services from his residence.
7. Non-Competition and Trade Secrets
(a) Confidentiality and Work Product. During the Term and thereafter
without limitation of time, Consultant shall not knowingly divulge, furnish, or
make available to any third
4
<PAGE>
person, company, corporation or other organization (including but not limited
to customers, competitors or government officials), except in the course of
performing his duties as a Consultant hereunder or with the Company's prior
written consent or as may be provided by applicable law, rules or regulations,
trade secrets or other confidential information concerning the Company, its
subsidiaries or affiliates or the business of any of the foregoing, including
without limitation, confidential methods of operation and organization and
confidential sources of supply and customer lists, but Consultant may make
disclosures as required by applicable law or orders without prior written
notice to the Company. For purposes of this Paragraph 7, information shall not
be deemed confidential if it (i) is within the public domain, or (ii) becomes
publicly known other than through disclosure by Consultant in violation of this
provision.
(b) Non-Competition. During the Term and for a period of three (3)
years thereafter, Consultant agrees not to directly or indirectly, own,
control, manage, operate, participate or invest in, including, but not limited
to, as an officer, director, shareholder, employee, consultant, agent, or
otherwise be connected with, in any manner, any business, enterprise or venture
which is engaged in the business of manufacturing and/or distributing of
carrying cases supplied to the cellular telephone, home medical equipment,
laptop computer, photography, video or audio industries and any other business
engaged in by the Company during the Consultant Term, except that nothing in
this subparagraph shall be deemed to prohibit Consultant from the acquisition
or holding of, solely as a passive stockholder, not more than one percent (1%)
of the shares or other securities of a publicly-owned corporation if such
securities are traded on a national securities exchange or over-the-counter.
(c) Solicitation. During the Term and for a period of three (3) years
thereafter, Consultant agrees not to directly or indirectly solicit, employ or
retain or arrange to have any other
5
<PAGE>
person, firm or other entity solicit, employ, retain, or otherwise participate
in the employment or retention of, any person who is then, or who has been,
within the preceding six (6) months, an employee, technician or engineer of the
Company, its subsidiaries or affiliates.
8. Separability
Consultant agrees that the provisions of Paragraph 7 hereof constitute
independent and separable covenants, for which Consultant is receiving
consideration which shall survive the termination of the consultancy and which
shall be enforceable by the Company notwithstanding any rights or remedies the
Company may have under any other provision hereof.
9. Relationship of the Parties
Nothing contained in this Agreement shall authorize, empower or
constitute Consultant as the agent of the Company in any manner; authorize or
empower Consultant to assume or create any obligation or responsibility
whatsoever, express or implied, on behalf of or in the name of the Company; or
authorize or empower Consultant to bind the Company in any manner or to make
any representation, warranty, or commitment on behalf of the Company, without
the prior written consent of the Company.
10. Notices
Any notice or other communication required or permitted to be given
hereunder shall be in writing and shall be mailed by certified mail, return
receipt requested, sent by overnight courier or facsimile transmission or
delivered against receipt to the party to whom it is to be given at the address
of such party set forth in the preamble to this Agreement (or to such other
address as the party shall have furnished in writing in accordance with the
provisions of this Paragraph 10). Any notice or other communication given by
certified mail shall be deemed given at the time of certification thereof; any
notice sent by overnight courier shall be deemed given on the next business
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<PAGE>
day after delivery to the courier; any notice sent by facsimile transmission
shall be deemed given upon receipt (electronically or otherwise); and any
notice delivered against receipt shall be deemed given upon receipt, except in
each case for a notice changing a party's address which shall be deemed given
at the time of receipt thereof.
11. Waiver
Any waiver by either party of a breach of any provision of this
Agreement shall not operate as or be construed to be a waiver of any other
breach of such provision or of any breach of any other provision of this
Agreement. The failure of a party to insist upon strict adherence to any term
of this Agreement on one or more occasions shall not be considered a waiver or
deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. Any waiver must be in writing.
12. Binding Effect; Assignment
This Agreement shall be binding upon and inure to the benefit of the
parties hereto, the successors and assigns of the Company and the assigns,
heirs and personal representatives of Consultant; provided, however, that
Consultant may not assign, transfer or otherwise convey any of his rights or
delegate any of his duties under this Agreement without the written consent of
the Company.
13. Governing Law
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York without giving effect to principles governing
conflicts of law.
14. Entire Agreement
This Agreement represents the entire agreement with respect to the
matters contemplated herein, supercedes any prior oral or written agreements or
undertakings between the
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<PAGE>
parties with respect to such matters and may not be modified or amended except
in a writing duly executed by each of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
FORWARD INDUSTRIES, INC.
By: /s/ Jerome E. Ball
---------------------------
Jerome E. Ball
Chief Executive Officer
/s/ Theodore H. Schiffman
------------------------------
Theodore H. Schiffman
8
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT effective as of October 1, 1998 between Forward Industries, Inc.,
a New York corporation with offices at 400 Post Avenue, Westbury, New York
11590 (the "Company"), and Michael Schiffman residing at 894 Green Place,
Woodmere, New York 11598 ("Executive").
W I T N E S S E T H:
WHEREAS, Executive has been rendering services to the Company pursuant to
an employment agreement effective as of November 1, 1997 (the "Prior
Agreement")
WHEREAS, the Company desires to terminate the Prior Agreement and employ
Executive to perform senior executive and other services for the Company, and
Executive desires to accept such employment, all on the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and other good and valuable consideration, the receipt of which the parties
acknowledge, the parties agree as follows:
Termination of Prior Agreement
The Prior Agreement is hereby terminated and shall be of no further
force and effect, and the terms and conditions of this Agreement supersede the
terms and conditions of the Prior Agreement. The Company has no remaining
obligations under the Prior Agreement.
<PAGE>
Employment and Duties
The Company hereby employs Executive for the term of this Agreement
and Executive hereby accepts such employment as the President and Chief
Operating Officer of the Company on the terms and conditions set forth in this
Agreement.
1. Employment Term
Unless terminated at an earlier date pursuant to the terms of this
Agreement, the term of employment hereunder (the "Employment Term") shall be
three (3) years, commencing on the date hereof (the "Commencement Date").
2. Services
a. Executive shall perform such duties of a senior executive nature
for the Company, as shall be consistent with the provisions of the Company's
By-laws in effect on the date hereof, subject to the direction of the Board of
Directors of the Company (the "Board"). Executive shall serve the Company
faithfully and to the best of his ability and shall devote his full business
time and attention to the affairs of the Company, subject to reasonable
absences for vacation and illness as determined by the Board.
b. The headquarters for the performance of Executive's services during
the term of this Agreement shall be the principal executive offices of the
Company in Westbury, New York, unless otherwise agreed by the Company and
Executive and subject to such reasonable travel in the performance of
Executive's duties as the business of the Company may require.
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3. Compensation and Expense Reimbursement
a. Salary. Executive shall be entitled to receive for all services
rendered by Executive in any capacity, an annual salary at the rate of $230,000
(payable in equal installments in accordance with the then prevailing practices
of the Company, but in no event less frequently than monthly), subject to
adjustment upon terms agreed upon by the Company and Executive.
b. Bonus. The Executive shall receive a bonus with respect to each
full fiscal year ended during the Employment Term equal to three percent (3%)
of all sales by the Company over $13 million per year as shown in its financial
statements for each such fiscal year, payable on a pro rata basis quarterly
during the following fiscal year.
c. Expenses. Executive will be reimbursed for all reasonable and
necessary expenses incurred by Executive in carrying out the duties
contemplated under this Agreement, in accordance with then prevailing Company
procedure, as such practices may be changed from time to time by the Board.
d. Stock Options. Executive shall be granted options under the
Company's 1996 Stock Incentive Plan (the "Plan") to purchase up to 600,000
shares of common stock, par value $.01 per share (the "Common Stock"), of the
Company at an exercise price equal to the market value of the Company's Common
Stock at the time such options become vested, vesting upon the Company's
achievement of the following agreed upon targets: 200,000 options upon the
Company achieving sales in any fiscal year of $16.0 million, 200,000 options
upon the Company achieving sales in any fiscal year of $18.5 million and
200,000 options upon the Company achieving sales in any fiscal year of $21.0
million.
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<PAGE>
e. Benefits. Executive shall be entitled to participate in all group
health and other insurance programs and all other fringe benefit or retirement
plans (including any 401(k) plan) or other compensatory plans which the Company
may hereafter elect to make available to its executives generally on terms no
less favorable than those provided to other executives generally, provided
Executive meets the qualifications therefor, but the Company shall not be
required to establish any such program or plan, except as provided in this
Paragraph 3.
4. Termination for Cause
In the event of: (a) fraud against the Company, conviction of a
felony, the intentional disclosure of confidential information (unless required
by applicable law or court or other order), aiding a competitor to the
detriment of the Company, its subsidiaries or affiliates, intentionally
engaging in conduct which brings disrepute or otherwise is damaging to the
reputation of the Company, its subsidiaries or affiliates, performing
competitive services or acting in a competitive capacity for any other person,
firm or corporation without the prior written consent of the Company; or (b)
willful misconduct, gross negligence, prolonged and unexcused absenteeism by
Executive in connection with Executive's employment hereunder, a breach by
Executive of the terms of this Agreement which has a material adverse effect on
the Company, or Executive's willful or intentional failure to implement the
reasonable business requests or directions of the Board, the Company shall have
the right to give Executive a termination notice, specifying the nature of the
breach or failure. If such termination notice is given pursuant to clause (a)
above, the Employment Term shall terminate upon the giving of such notice. If
such termination notice is given pursuant
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to clause (b) above, the Employment Term shall terminate thirty (30) days after
the giving of such notice if the circumstances described in such notice have
not been remedied by Executive within such thirty (30)-day period. Upon the
termination of the Employment Term pursuant to this Paragraph 4, all provisions
of this Agreement shall terminate except for the provisions of Paragraphs 6 and
7. Upon the effective date of termination of the Executive's employment with
the Company, the Company shall have no further obligation to Executive
hereunder, except for accrued and unpaid salary, and other previously earned,
accrued and unpaid benefits from the Company and its employee benefit plans
through the date of termination.
5. Illness or Incapacity
In the event of any disability, illness or other incapacity which
prevents Executive from performing services as contemplated herein, the
obligation of the Company to pay compensation to Executive shall be reduced to
the extent of any amount received by Executive pursuant to any disability
insurance policy maintained and paid for by the Company. If Executive shall be
incapacitated for more than 120 consecutive days or 180 days in any consecutive
12-month period, the Company shall have the right to terminate this Agreement
upon 10 days' prior written notice with no further liability, except for
accrued and unpaid salary, and other previously earned, accrued and unpaid
benefits from the Company and its employee benefit plans through the date of
such termination, provided that such termination shall not prejudice any rights
of Executive under any disability policies being maintained by the Company for
Executive under the terms of this
-5-
<PAGE>
Agreement. Notwithstanding any such termination, the provisions of Paragraphs 7
and 8 will continue to apply.
6. Death This Agreement shall terminate automatically upon the death of
Executive. In such event, the Company shall pay the estate of Executive, in
addition to any amounts to which Executive's estate would otherwise be entitled
under the Company's retirement plans and group life insurance policy, within 30
days after the date of death, all compensation earned under Paragraph 4 through
the date of death. Thereafter, if the Company is the recipient of at least
$1,000,000 of insurance on the life of the Executive, the Company will pay to
the Widow of the Executive or, if the Executive's spouse has pre-deceased him,
to the Executive's estate, a monthly death benefit of $5,500, payable on the
first day of each month during the 10 year period following the date of the
Executive's death, commencing with the first calendar month following the month
in which the Executive died; if the Widow dies prior to the end of such 10 year
period, then after the Widow's death, such monthly payments will be made to the
Widow's estate for the balance of such 10 year period. If the Company is not
the recipient of at least $1,000,000 of insurance on the life of the Executive,
such monthly death benefits will be paid for a period of three years, followed
by monthly death benefits of $2,750 for seven years; if the Widow dies prior to
the end of such 10-year period, then, upon the Widow's death, such payments
shall cease. Payments will be made by mail to the recipient at such address as
the recipient may designate in writing to the Company from time to time.
-6-
<PAGE>
7. Non-Competition and Trade Secrets
a. Confidentiality and Work Product. During the term of this Agreement
and thereafter without limitation of time, Executive shall not knowingly
divulge, furnish, or make available to any third person, company, corporation
or other organization (including but not limited to customers, competitors or
government officials), except in the course of performing his duties as an
Executive hereunder or with the Company's prior written consent, trade secrets
or other confidential information concerning the Company, its subsidiaries or
affiliates or the business of any of the foregoing, including without
limitation, confidential methods of operation and organization and confidential
sources of supply and customer lists, but Executive may make disclosures as
required by applicable law or orders without prior written notice to the
Company. For purposes of this Paragraph 7, information shall not be deemed
confidential if it (i) is within the public domain, or (ii) becomes publicly
known other than through disclosure by Executive in violation of this
provision.
b. Non-Competition. During the Employment Term and for a period of
three (3) years thereafter, Executive agrees not to directly or indirectly,
own, control, manage, operate, participate or invest in, including, but not
limited to, as an officer, director, shareholder, employee, consultant, agent,
or otherwise be connected with, in any manner, any business, enterprise or
venture which is engaged in the business of manufacturing and/or distributing
of carrying cases supplied to the cellular telephone, home medical equipment,
laptop computer, photography, video or audio industries and any other business
engaged in by the Company during the Employment Term, except that nothing in
this subparagraph shall be deemed to prohibit Executive from the
-7-
<PAGE>
acquisition or holding of, solely as a passive stockholder, not more than one
percent (1%) of the shares or other securities of a publicly-owned corporation
if such securities are traded on a national securities exchange or over the
counter.
c. Solicitation. During the Employment Term and for a period of three
(3) years thereafter, Executive agrees not to directly or indirectly solicit,
employ or retain or arrange to have any other person, firm or other entity
solicit, employ, retain, or otherwise participate in the employment or
retention of, any person who is then, or who has been, within the preceding six
(6) months, an employee, technician or engineer of the Company, its
subsidiaries or affiliates.
d. In the event Executive shall violate any provisions of this
Paragraph 7 (which provisions Executive hereby acknowledges are reasonable and
equitable), Executive shall no longer be entitled to and hereby waives any and
all rights to any termination payment under this Agreement.
8. Separability
Executive agrees that the provisions of Paragraph 7 hereof constitute
independent and separable covenants, for which Executive is receiving
consideration which shall survive the termination of employment and which shall
be enforceable by the Company notwithstanding any rights or remedies the
Company may have under any other provision hereof.
9. Specific Performance
Executive acknowledges that:
-8-
<PAGE>
(i) the services to be rendered under the provisions of this Agreement
are of a special character and it would be difficult to replace such services;
(ii) the Company is relying on the covenants contained herein,
including, without limitation, those contained in Paragraph 7 above, as a
material inducement for entering into this Agreement;
(iii) the Company may be damaged if the provisions hereof are not
specifically enforced; and
(iv) the award of monetary damages may not adequately protect the
Company in the event of a breach hereof by Executive.
By virtue thereof, Executive agrees and consents that if Executive
breaches any of the provisions of this Agreement, the Company, in addition to
any other rights and remedies available under this Agreement or otherwise,
shall (without any bond or other security being required and without the
necessity of proving monetary damages) be entitled to a temporary and/or
permanent injunction to be issued by a court of competent jurisdiction
restraining Executive from committing or continuing any violation of this
Agreement, or any other appropriate decree of specific performance. Such
remedies shall not be exclusive and shall be in addition to any other remedy
which the Company may have.
-9-
<PAGE>
10. Miscellaneous
a. Entire Agreement; Amendment. This Agreement constitutes the entire
employment agreement between the parties and may not be modified, amended or
terminated (other than pursuant to the terms hereof) except by a written
instrument executed by the parties hereto. All other agreements between the
parties pertaining to the employment or remuneration of Executive not
specifically contemplated hereby or incorporated or merged herein are
terminated and shall be of no further force or effect.
b. Assignment. This Agreement is not assignable by Executive without
the prior written consent of the Company and any purported assignment by
Executive of Executive's rights and/or obligations under this Agreement shall
be null and void. This Agreement may be assigned by the Company at any time,
upon delivery of written notice to Executive (with Executive's consent, not to
be unreasonably withheld), to any successor to the business of the Company, or
to any subsidiaries or affiliates of the Company. In the event that Executive
does not consent to the assignment of this Agreement, the Company shall have
the right to terminate this Agreement automatically with no further liability,
except for accrued and unpaid salary, and other previously earned, accrued and
unpaid benefits from the Company and its employee benefit plans.
c. Waivers, etc. No waiver of any breach or default hereunder shall be
considered valid unless in writing, and no such waiver shall be deemed a waiver
of any subsequent breach or default of the same or similar nature. The failure
of any party to insist upon strict adherence to any term of this Agreement on
any occasion shall not operate or be construed as a
-10-
<PAGE>
waiver of the right to insist upon strict adherence to that term or any other
term of this Agreement on that or any other occasion.
d. Provisions Overly Broad. In the event that any term or provision of
this Agreement shall be deemed by a court of competent jurisdiction to be
overly broad in scope, duration or area of applicability, the court considering
the same shall have the power and hereby is authorized and directed to modify
such term or provision to limit such scope, duration or area, or all of them,
so that such term or provision is no longer overly broad and to enforce the
same as so limited. Subject to the foregoing sentence, in the event that any
provision of this Agreement shall be held to be invalid or unenforceable for
any reason, such invalidity or unenforceability shall attach only to such
provision and shall not affect or render invalid or unenforceable any other
provision of this Agreement.
e. Notices. Any notice permitted or required hereunder shall be in
writing and shall be deemed to have been given on the date of delivery or, if
mailed by certified mail, postage prepaid, return receipt requested, documented
overnight courier, or by facsimile transmission, on the date mailed or
transmitted.
(i) If to Executive to:
Michael Schiffman at
894 Green Place
Woodmere, New York 11598
(ii) If to the Company to:
400 Post Avenue
Westbury, New York 11590
Attention: Chairman of the Board
with a copy to:
-11-
<PAGE>
Squadron, Ellenoff, Plesent & Sheinfeld, LLP
551 Fifth Avenue
New York, New York 10176
Attention: Kenneth R. Koch, Esq.
Telecopy: (212) 697-6686
F. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK GOVERNING CONTRACTS MADE AND TO BE
PERFORMED IN NEW YORK WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES THEREOF.
g. This Agreement shall be binding upon and inure to the benefit of
the parties and their respective heirs, executors, administrators, personal
representatives, successors and permitted assigns.
h. This Agreement may be executed in counterparts, each of which shall
be deemed an original, and each party may become a party hereto by executing a
counterpart hereof. This Agreement and any counterpart so executed shall be
deemed to be one and the same instrument. It shall not be necessary in making
proof of this Agreement or any counterpart hereof to produce or account for any
of the other counterparts.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
EXECUTIVE FORWARD INDUSTRIES, INC.
/s/ Michael Schiffman By: /s/ Jerome E. Ball
- ----------------------------- ----------------------------------
Michael Schiffman Name: Jerome E. Ball
Title: Chief Executive Officer
-12-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S AUDITED BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND AUDITED
STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS THEN ENDED
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 703,920
<SECURITIES> 0
<RECEIVABLES> 3,017,643
<ALLOWANCES> 110,800
<INVENTORY> 1,083,662
<CURRENT-ASSETS> 5,667,726
<PP&E> 283,980
<DEPRECIATION> 96,526
<TOTAL-ASSETS> 8,086,076
<CURRENT-LIABILITIES> 4,624,919
<BONDS> 0
0
0
<COMMON> 49,630
<OTHER-SE> 3,411,527
<TOTAL-LIABILITY-AND-EQUITY> 8,086,076
<SALES> 13,028,888
<TOTAL-REVENUES> 13,028,888
<CGS> 9,321,337
<TOTAL-COSTS> 9,321,337
<OTHER-EXPENSES> 14,291,640
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 302,354
<INCOME-PRETAX> (798,628)
<INCOME-TAX> 280,148
<INCOME-CONTINUING> (1,078,776)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,078,776)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
