<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the quarterly period ended June 30, 1999.
Or
[ ] 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.
(Exact name of registrant as specified in its charter)
New York 13-1950672
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 Post Avenue, Westbury, NY 11590
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
(516) 338-0700
------------------------------------------------
(Issuer's Telephone Number, including Area Code)
------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [ ].
As of August 5, 1999, 5,938,141 shares of the issuer's Common Stock were
outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
- --------------------------------------------------------------------------------
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
FORM 10-QSB
NINE MONTHS ENDED JUNE 30, 1999
CONTENTS
PAGE
----
PART I.FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Consolidated Balance Sheets
as of June 30, 1999 (Unaudited)
and September 30, 1998 3
Consolidated Statements of Income
(Unaudited) for the Nine Months
ended June 30, 1999 and 1998 5
Consolidated Statements of Comprehensive Income
for the Nine Months ended June 30, 1999 and 1998 6
Consolidated Statements of Cash Flows
(Unaudited) for the Nine Months
ended June 30, 1999 and 1998 7
Notes to Form 10-QSB (Unaudited) 9
Item 2. Management's Discussion and Analysis 17
PART II.OTHER INFORMATION 21
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
2
<PAGE>
PART I. ITEM 1. FINANCIAL STATEMENTS
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
---------- ----------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 334,593 $ 703,920
Accounts receivable, less allowance for doubtful
accounts of $104,800 and $110,800 2,348,059 2,906,843
Inventories - net 1,239,399 1,083,662
Notes and loans receivable - current portion 336,363 350,822
Notes and loans receivable - officers - current portion 30,529 32,311
Prepaid expenses and other current assets 447,069 343,536
Deferred income taxes 122,725 246,632
---------- ----------
Total current assets 4,853,737 5,667,726
---------- ----------
PROPERTY, PLANT AND EQUIPMENT - net 469,188 187,454
---------- ----------
OTHER ASSETS:
Deferrred income taxes 1,502,395 1,502,395
Note receivable - net of current portion 107,084 345,766
Property and equipment held for sale --
154,200
Notes and loans receivable - officers - net of
current portion 76,503 83,962
Deferred debt costs 51,538 85,161
Other assets 73,472 59,412
---------- ----------
2,280,180 2,230,896
---------- ----------
$7,133,917 $8,086,076
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, September 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
- ------------------------------------ ----------- -----------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Borrowings under credit line $ 909,188 $ 1,244,103
Accounts payable 1,259,308 1,215,572
Convertible notes payable -- 554,000
Notes payable - related party -- 42,670
Accrued expenses and other current liabilities 589,582 1,218,574
Accrued severance to officer 150,000 350,000
----------- -----------
Total current liabilities 2,908,078 4,624,919
----------- -----------
COMMITMENTS
STOCKHOLDER'S EQUITY:
Preferred stock, 4,000,000 authorized shares par
value $.01; none issued -- --
Common stock, 40,000,000 authorized shares, par value
$.01; issued 6,103,031 shares and 4,973,031 shares
(including 164,890 held in treasury) 61,030 49,630
Paid-in capital 7,375,353 6,551,703
Accumulated deficit (2,975,486) (2,884,346)
Comprehensive income adjustment 3,055 (17,717)
----------- -----------
4,463,952 3,699,270
Less: Cost of shares in treasury 238,113 238,113
----------- -----------
Total stockholders' equity 4,225,839 3,461,157
----------- -----------
$ 7,133,917 $ 8,086,076
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------------- ------------------------------
1999 1998 1999 1998
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
NET SALES $ 3,821,585 $ 3,066,961 $ 11,420,320 $ 9,265,256
COST OF GOODS SOLD 2,700,169 2,122,064 8,102,089 6,285,992
----------- ----------- ------------ -----------
GROSS PROFIT 1,121,416 944,897 3,318,231 2,979,264
----------- ----------- ------------ -----------
OPERATING EXPENSES:
Distribution 8,406 12,972 28,472 21,292
Selling 399,875 308,681 1,132,064 966,858
General and administration 558,549 460,070 1,864,337 1,604,345
----------- ----------- ------------ -----------
966,830 781,723 3,024,873 2,592,495
----------- ----------- ------------ -----------
INCOME FROM OPERATIONS 154,586 163,174 293,358 386,769
----------- ----------- ------------ -----------
OTHER INCOME (DEDUCTIONS):
Interest expense (25,398) (75,891) (95,920) (227,447)
Interest expense - related parties (196) (9,482) (1,709) (9,482)
Interest income 16,638 46,547 57,271 115,053
Rental income - net -- -- -- (60,730)
Other income - net (25,370) (46,985) 56,767 555,386
----------- ----------- ------------ -----------
(34,326) (85,811) 16,409 372,780
----------- ----------- ------------ -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 120,260 77,363 309,767 759,549
PROVISION FOR INCOME TAXES 48,104 30,945 123,907 303,818
----------- ----------- ------------ -----------
INCOME BEFORE EXTRAORDINARY ITEM 72,156 46,418 185,860 455,731
----------- ----------- ------------ -----------
EXTRAORDINARY ITEM:
Non-cash interest charge upon conversion
of promissory notes (net of income tax
benefit of $ -0-) (Note 4) -- -- (277,000) --
----------- ----------- ------------ -----------
NET INCOME $ 72,156 $ 46,418 $ (91,140) $ 455,731
=========== =========== ============ ===========
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE:
Basic:
Income before extraordinary item $ 0.01 $ 0.01 $ 0.03 $0 .10
Extraordinary item -- -- (0.05) --
----------- ----------- ------------ -----------
$ 0.01 $ 0.01 $ (0.02) $ 0.10
=========== =========== ============ ===========
Diluted:
Income before extraordinary item $ 0.01 $ 0.01 $ 0.03 $ 0.08
Extraordinary Item -- -- (0.05) --
----------- ----------- ------------ -----------
$ 0.01 $ 0.01 $ (0.02) $ 0.08
=========== =========== ============ ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 5,931,474 4,748,141 5,670,808 4,601,475
=========== =========== ============ ===========
DIVIDENDS NONE NONE NONE N0NE
</TABLE>
5
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(UNAUDITED)
Nine Months Ended
June 30,
-----------------------
1999 1998
-------- --------
NET INCOME (LOSS) $(91,140) $455,731
COMPREHENSIVE INCOME ADJUSTMENTS:
Foreign currency translation 20,772 --
-------- --------
COMPREHENSIVE INCOME (LOSS) $(70,368) $455,731
======== ========
The accompanying notes are an integral part of these financial statements
6
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
---------------------------
1999 1998
--------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ (91,140) $ 455,731
Adjustments to reconcile net income to net cash provided
by (used in) continuing operations:
Extraordinary interest charge 277,000 --
Gain on sale of property and equipment (73,769) (593,076)
Depreciation and amortization 38,491 85,484
Amortization of deferred debt costs 36,434 89,406
Deferred taxes 123,907 303,818
Non-cash compensation -- 51,287
Changes in assets and liabilities:
Accounts receivable 558,784 967,927
Inventories (155,737) (613,979)
Prepaid expenses and other current assets 87,221 (106,002)
Other assets (14,060) (37,416)
Accounts payable 43,736 (733,470)
Accrued expenses and other current liabilities (628,992) 4,570
Accrued severance to officer (200,000) --
--------- -----------
NET CASH (USED IN) PROVIDED BY OPERATIONS 1,875 (125,720)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of property and equipment 37,215 643,830
Proceeds from notes and loans receivable 258,141 694,737
Proceeds from collections from officers 9,241 42,750
Purchases of property, plant and equipment (320,225) (104,500)
--------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (15,628) 1,276,817
--------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
7
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
---------------------------
1999 1998
--------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) short-term borrowings (334,915) (516,569)
Proceeds from long-term notes -- 10,000
Payments of long-term notes -- (225,001)
Payments of mortgage -- (1,057,748)
Payments of notes payable - related parties (42,670) (30,000)
Proceeds from issuances of stock 16,000 414,000
Deferred offering costs (11,950) (23,532)
Deferred debt costs (2,811) (93,469)
--------- -----------
NET CASH USED IN FINANCING ACTIVITIES (376,346) (1,522,319)
--------- -----------
EFFECT OF EXCHANGE RATE CHANGES 20,772 --
--------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (369,327) (371,222)
CASH AND CASH EQUIVALENTS - beginning 703,920 1,365,198
--------- -----------
CASH AND CASH EQUIVALENTS - ending $ 334,593 $ 993,976
========= ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 51,657 $ 77,503
Income taxes $ 1,981 $ 10,422
SCHEDULE OF NON-CASH ACTIVITES:
Discount on repayment of mortgage debt $ -- $ 55,529
Offset of deferred offering costs to paid in capital $ -- $ 90,474
Warrants issued for services rendered $ -- $ 10,417
Issuance of common stock upon conversion of
long-term debt $ 554,000 $ --
Issuance of promissory notes upon closing of
Private Placement Units $ -- $ 185,000
Sale of property and equipment held for sale $ 190,554 $ --
Conversion of amounts due from sale of
business to notes receivable $ -- $ 97,785
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
8
<PAGE>
FORWARD INDUSTRIES, INC.AND SUBSIDAIRIES
NOTES TO FORM 10-QSB
NINE MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The information in this Form 10-QSB includes the results of operations
of Forward Industries, Inc. ("the Company") and its wholly-owned
subsidiary, Koszegi Industries, Inc. ("Koszegi"), for the periods ended
June 30, 1999 and 1998. The data is unaudited, but includes all
adjustments including the elimination of intercompany accounts and
transactions which are, in the opinion of management, necessary for a
fair presentation of the interim periods presented.
The accounting policies utilized in the preparation of this Form 10-QSB
are the same as those set forth in the Company's annual Form 10-KSB for
the fiscal year ended September 30, 1998 and should be read in
conjunction with the disclosures presented therein.
Certain prior period balances have been reclassified to conform to the
current period classification.
All information in this Form 10-QSB has been adjusted to give effect
for a one-for-two reverse stock split, as declared by the Board of
Directors, of the Company's issued and outstanding common stock, par
value $.01 per share, effected on December 23, 1997.
This Quarterly Report may contain forward-looking statements which
involve certain risks and uncertainties. Important factors could arise,
including those identified in "Risk Factors" in the Company's form
10-KSB for the year ended September 30, 1998, which could cause the
Company's operating results to differ materially from those contained
in any forward looking statement.
2. EARNINGS PER SHARE
Earnings per share are based on the weighted average number of shares
outstanding during each period presented. The Company has adopted FAS
128, "Earnings Per Share" and has restated prior periods to comply with
the provisions of this pronouncement.
3. BORROWINGS UNDER CREDIT LINE
In April 1998, the Company established a credit facility with a bank
which provides for a maximum line of credit for working capital of $4.5
million, including letters of credit. Borrowing availability is based
on a formula of accounts receivable and inventory. At June 30, 1999,
amounts outstanding were $909,200. In addition, the Company was
contingently liable under letters of credit and acceptances in the
amount of $425,400. The credit agreement provides for certain financial
covenants with which Forward and Koszegi were in compliance.
4. ISSUANCE OF COMMON STOCK FOR PROMISSORY NOTES
In December 1997, the Company consummated a private offering 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 convertible promissory notes. 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
9
<PAGE>
and Private Placement Warrants to purchase 1,662,000 shares of Common
Stock (such warrants expired on March 15, 1999 and are no longer
outstanding). Interest, which had accrued on such Notes of
approximately $72,000, was paid on that date.
In connection with the conversion of its Notes into Common Stock, the
Company recorded a non-cash, extraordinary charge against earnings of
$277,000. This amount, recorded as interest expense, reflects the
difference between the average bid and asked price per share of the
Company's stock on December 4, 1998 (the date on which such conversion
occurred) on the Nasdaq SmallCap Market, $.75, and, the price at which
the Company converted such shares, $.50, aggregated by the total shares
issued. No tax benefit has been recorded in connection with this
interest charge as it is not deductible for federal income taxes.
5. INVENTORY
Inventory consists of the following:
June 30, 1999 September 30, 1998
------------- ------------------
(Unaudited)
Raw materials $ 76,931 $ 101,859
Work in process -- 119,095
Finished goods 1,162,468 862,708
------------ ----------
$ 1,239,399 $1,083,662
============ ==========
6. SALE OF ASSETS
In December 1997, the Company sold a building for $830,000 and
recognized a profit of approximately $669,000. Such profit is included
in other income in the consolidated statement of income for the nine
months ended June 30, 1998.
During the second quarter ended March 31, 1999, the Company sold
certain production equipment and recognized a profit of approximately
$74,000. The profit is included in other income in the consolidated
statement of income for the nine months ended June 30, 1999.
10
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
------------------------------------------
1999 1998
---------- ----------
<S> <C> <C>
NUMERATOR
Income from continuing operations:
Income from continuing operations: $ 72,156 $ 46,418
Less: Preferred dividends -- --
---------- ----------
Income available to common stockholders
used in basic EPS 72,156 BASIC 46,418
Impact of potential common shares:
Convertible debt -- 8,310
Income available to common stockholders after
assumed conversions of dilutive securities $ 72,156 DILUTED $ 54,728
========== ==========
DENOMINATOR
Weighted average number of common shares
outstanding - See schedule 5,931,474 BASIC 4,748,141
Impact of potential common shares:
Stock options and warrants 165,965 385,078
Convertible debt N/A 1,108,000
---------- ----------
Weighted average number of common shares and
dilutive potential common stock used in dilutive EPS 6,097,439 DILUTED 6,241,219
========== ==========
BASIC EPS
Income from continuing operations $ 0.01 $ 0.01
DILUTED EPS
Income from continuing operations $ 0.01 $ 0.01
</TABLE>
11
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------------
1999 1998
-------- ----------
<S> <C> <C>
CALCULATIONS
1. Stock Options
Treasury Stock Method Applied to Stock Options
Sale of common stock
Total options and warrants outstanding 486,800 1,121,250
Average price $ 0.87 $ 1.87
-------- ----------
Total $423,400 $2,091,719
======== ==========
Repurchase of common stock
Proceeds $423,400 $2,091,719
Average stock price $ 1.32 $ 2.84
-------- ----------
Shares repurchased 320,835 736,172
======== ==========
Net increase in shares
Shares sold 486,800 1,121,250
Shares repurchased 320,835 736,172
-------- ----------
Increase in shares 165,965 504,514
======== ==========
2. Convertible debt
Terms:
Interest rate -- 10%
Par -- $ 10,000
Convertible into shares -- 20,000
Conversion price -- N/A
# of units -- $ 55.4
Total debt -- $ 554,000
If-converted Method Applied to Convertible Debt
Numerator increase - interest savings assuming
a 40% tax rate $ -- $ 8,310
======== ==========
Denominator increase - assuming conversion -- 1,108,000
======== ==========
12
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE
Computation of Weighted Average Number of Common Shares Outstanding
THREE MONTHS ENDED JUNE 30, 1999
--------------------------------
Weighted
Dates Shares Fraction of Average
Outstanding Outstanding Period Shares
----------- ----------- ------ ------
April through May 5,928,141 2/3 3,952,094
Common stock issued in connection with
conversion of Class B warrants 10,000
---------
June 5,938,141 1/3 1,979,380
---------
Weighted Average Shares 5,931,474
=========
THREE MONTHS ENDED JUNE 30, 1998
--------------------------------
Weighted
Dates Shares Fraction of Average
Outstanding Outstanding Period Shares
----------- ----------- ------ ------
April through May 4,723,141 2/3 3,148,761
Common stock issued for exercised
options 75,000
---------
June 4,798,141 1/3 1,599,380
Weighted Average Shares 4,748,141
=========
</TABLE>
13
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
--------------------------
1999 1998
-------------- ----------
<S> <C> <C> <C>
NUMERATOR
Income from continuing operations:
Income from continuing operations: $ 185,860 $ 455,731
Less: Preferred dividends -- --
-------------- ----------
Income available to common stockholders
used in basic EPS 185,860 BASIC 455,731
Impact of potential common shares:
Convertible debt -- 24,930
Income available to common stockholders after
assumed conversions of dilutive securities $ 185,860 DILUTED $ 480,661
============== ==========
Loss from extraordinary item $ (277,000) $ --
============== ==========
DENOMINATOR
Weighted average number of common shares
outstanding - See schedule 5,670,808 BASIC 4,601,475
Impact of potential common shares:
Stock options and warrants 107.846 353,466
Convertible debt N/A 1,108,000
-------------- ----------
Weighted average number of common shares and
dilutive potential common stock used in dilutive EPS 5,778,654 DILUTED 6,062,941
============== ==========
BASIC EPS
Income from continuing operations $ 0.03 $ 0.10
Extaordinary Item (0.05) 0.00
-------------- ----------
$ (0.02) $ 0.10
============== ==========
DILUTED EPS
Income from continuing operations $ 0.03 $ 0.08
Extraordinary Item (0.05) 0.00
-------------- ----------
$ (0.02) $ 0.08
============== ==========
</TABLE>
14
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
CALCULATIONS
1. Stock Options
Treasury Stock Method Applied to Stock Options
Sale of common stock
Total options and warrants outstanding 486,800 1,121,250
Average price $ 0.87 $ 1.87
---------- ----------
Total $ 423,400 $2,091,719
========== ==========
Repurchase of common stock
Proceeds $ 423,400 $2,091,719
Average stock price $ 1.12 $ 2.72
---------- ----------
Shares repurchased 378,954 767,784
========== ==========
Net increase in shares
Shares sold 486,800 1,121,250
Shares repurchased 378,954 767,784
---------- ----------
Increase in shares 107,846 353,468
========== ==========
2. Convertible debt
Terms:
Interest rate 10%
Par $ 10,000
Convertible into shares 20,000
Conversion price N/A
# of units $ 55.4
Total debt $ 554,000
If-converted Method Applied to Convertible Debt
Numerator increase - interest savings assuming
a 40% tax rate $ -- $ 24,930
========== ==========
Denominator increase - assuming conversion
-- 1,108,000
========== ==========
</TABLE>
15
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE
Computation of Weighted Average Number of Common Shares Outstanding
NINE MONTHS ENDED JUNE 30, 1999
-------------------------------
Weighted
Dates Shares Fraction of Average
Outstanding Outstanding Period Shares
----------- ----------- ------ ------
October through November 4,798,141 2/9 1,066,254
Common stock issued in connection with
conversion of private placement
debt, in December 1,108,000
---------
December through February 5,906,141 3/9 1,968,714
Common stock issued in connection with
conversion of Class B warrants 22,000
------
March through May 5,928,141 3/9 1,976,047
---------
Common stock issued in connection with
conversion of Class B warrants 10,000
------
June 5,938,141 1/9 659,793
Weighted Average Shares 5,670,808
=========
NINE MONTHS ENDED JUNE 30, 1998
-------------------------------
Weighted
Dates Shares Fraction of Average
Outstanding Outstanding Period Shares
----------- ----------- ------ ------
October through November 4,138,141 2/9 919,587
Common stock issued in connection
with private placement in December 585,000
---------
December through May 4,723,141 6/9 3,148,761
---------
Common stock issued for exercised
options 75,000
---------
June 4,798,141 1/9 533,127
Weighted Average Shares 4,601,475
=========
<PAGE>
PART I. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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. 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 (including those identified in "Risk Factors" in the Company's
form 10-KSB for the year ended September 30, 1998) and that actual results may
differ materially from those in the forward-looking statements as a result of
various factors.
The following discussion and analysis compares the results of the
Company's continuing operations for the Three and Nine Months ended June 30,
1999, and the Three and Nine Months ended June 30, 1998.
THREE MONTHS ENDED JUNE 30, 1999 (THE "1999 QUARTER") COMPARED TO THREE MONTHS
ENDED JUNE 30, 1998 (THE "1998 QUARTER")
The 1999 Quarter reflected net income of $72,200 compared to net income
of $46,400 in the 1998 Quarter. Basic and diluted earnings per share from
continuing operations were $0.01 in the 1998 Quarter and the 1999 Quarter.
REVENUES.
Net sales increased $754,600 (25%) to $3,821,600 in the 1999 Quarter,
from $3,067,000 in the 1998 Quarter. The increase is attributable to growth in
business from both existing and new customers, and specifically to the Company's
expansion efforts in its European operations and customer accounts. The Company
expects to report accelerated sales growth and substantial increases in
profitability in the next quarter.
OPERATING INCOME.
Consolidated pretax income from continuing operations increased by
$42,900 to a profit of $120,300 in the 1999 Quarter, from $77,400 in the 1998
Quarter. This improvement resulted primarily from $176,500 in increased gross
margin from higher sales, $51,500 in increases from other income items, offset
by $185,100 in increases in selling, general administrative expenses and
distribution, more fully described below. The gross margin percentage declined
from 31% in the 1998 Quarter to 29% in the 1999 Quarter. The decrease relates
substantially to increased costs and expenditures associated with the Company's
Hong Kong quality assurance and distribution facility. Greater expenditures were
required as overseas production demand increased due to customer requirements
and as a result of the shutdown of the South Bend facility.
Selling expenses increased $91,200 (30%) from $308,700 in the 1998
Quarter to $399,900 in the 1999 Quarter due to increases in salaries, wages and
benefits for both domestic and European sales staff, higher travel expenses and
warehousing fees, offset by lower advertising and costs for samples. However,
the ratio of selling expenses to net sales declined from 12% to 10%, due to
increase in revenues.
General and administrative expenses decreased as a percentage of net
sales to 15% in the 1999 Quarter from 19% in the 1998 Quarter but the dollar
amount of expenses increased $98,400 (21%) to $558,500 in the 1999 Quarter from
$460,100 in the 1998 Quarter. The increase is primarily related to payroll
increases associated with a new management team including the Chief Executive
Officer position, higher professional fees, public relations expenses and
telephone costs, partially offset by lower travel costs.
OTHER INCOME (DEDUCTIONS).
Total interest expenses decreased by $60,700 to $24,700 in the 1999
Quarter from $85,400 in the 1998 Quarter. The decrease was due to lower interest
rates, better collections of accounts receivable resulting in lower outstanding
bank borrowings, and lower interest due to the conversion of notes payable into
common stock in the 1999 Period. Interest income and other income-net decreased
to an expense of $8,700 in the 1999 Quarter from zero in the 1998 Quarter.
17
<PAGE>
INCOME TAXES.
The provision for income taxes increased by $17,200 to $48,100 due to
an increase in pretax profits in the 1999 Quarter from the comparable period in
the 1998 Quarter. The effective tax rates for the 1999 and 1998 Quarters were
40%.
NINE MONTHS ENDED JUNE 30, 1999 (THE "1999 PERIOD") COMPARED TO NINE MONTHS
ENDED JUNE 30, 1998 (THE "1998 PERIOD")
The 1999 Period reflected a net loss of ($91,100) compared to net
income of $455,700 in the 1998 Period. However, after excluding certain
non-recurring items in both periods, net income improved by nearly $131,600.
Excluding the gain on the sale of a building in the 1998 Period of $401,400, the
operations generated a net gain of approximately $54,300. In the 1999 Period,
operations generated net income of $185,900 prior to the extraordinary non-cash
charge of $277,000 described below. Basic earnings per share from continued
operations decreased from $0.10 in the 1998 Period to loss of $0.02 in the 1999
Period, while diluted earnings per share from continuing operations decreased
from $0.08 in the 1998 Period to loss of $0.02 in the 1999 Period, also as a
result of a non-recurring item.
REVENUES.
Net sales increased $2,155,000 (23%) to $11,420,330 in the 1999 Period,
from $9,265,300 in the 1998 Period. The increase is attributable to growth in
business from both existing and new customers and specifically attributable to
the Company's expansion efforts in its European business and customer accounts.
The Company expects to report accelerated sales growth and substantial increases
in profitability in the next quarter.
OPERATING INCOME.
Consolidated pretax income from continuing operations decreased by
$449,700 to a profit of $309,800 in the 1999 Period, from $759,500 in the 1998
Period. The decrease is wholly related to the gain on the sale of the Company's
building, representing $669,000 before tax, in the 1998 Period. Excluding this
item, the comparison would show a pretax operating income of $90,500 in the 1998
Period compared with pretax operating income in the 1999 Period of $309,800, an
increase of $219,300. The increase in pretax profits relates primarily to an
increase in gross margin of $338,900 resulting from higher sales, decreases in
interest expense of 139,300, and increases in other income items $173,500,
offset by increases in selling, distribution, general and administrative
expenses of $432,400, each described below.
Gross margin percentage decreased from 32% in the 1998 Period to 29% in
the 1999 Period. Approximately 2% of the change was for increased expenditures
at the Company's Hong Kong quality control center to meet the demands and costs
of increased business, as well as upgrading its operating standards for IS0 9002
Certification. The remainder of the margin percentage difference is related to
changes in the sales mix.
Selling expenses increased $165,200 (11%) from $966,900 in the 1998
Period to $1,132,100 in the 1999 Period due to increases in salaries both
domestically and in Europe, increased travel expenses, increased rent for
expanding the European operations and expenses for designs and printing, offset
by a reduction in advertising. The ratio of selling expenses to net sales was
10%, in both periods.
General and administrative expenses decreased as a percentage of net
sales, to 16% in the 1999 Period from 17% in the 1998 Period, but the dollar
amount of expenses increased $260,000 (14%) to $1,864,300 in the 1999 Period
from $1,604,300 in the 1997 Period. The increase is primarily related to higher
payroll expenses in association with expanding the senior management team,
including a new Chief Executive Officer, higher professional fees and telephone
costs offset by lower travel expenses.
OTHER INCOME (DEDUCTIONS).
Total interest expense decreased by $139,300 to $97,600 in the 1999
Period from $236,900 in the 1998 Period. The decrease was due to lower interest
rates, better collections of accounts receivable resulting in lower outstanding
bank borrowings, the conversion of notes payable into common stock in the 1999
Period, and the repayment of the mortgage on the Company's building in December
1997.
18
<PAGE>
The Company's rental building in Brooklyn, New York was sold in
December 1997. As a result, rental income - net decreased from a loss of
($60,700) in the 1998 Period to zero in the 1999 Period.
Interest income and other income - net decreased $495,700 to $114,000
in the 1999 Period from $609,200 in the 1998 Period. The decrease is primarily
related to the gain on the sale of the Brooklyn building of $669,000, recorded
in December 1997.
EXTRAORDINARY ITEM.
In December 1997, the Company consummated a private offering of
securities which included $554,000 in aggregate principal amount of convertible
Promissory Notes. The Notes were converted into Common Stock and warrants in
December 1998, at the option of the Company. In connection with the conversion
of its Notes into Common Stock, the Company recorded a non-cash, extraordinary
charge against earnings of $277,000. This amount, recorded as interest expense,
reflects the difference between the average bid and asked price per share of the
Company's stock on December 4, 1998 (the date on which such conversion occurred)
on the Nasdaq SmallCap Market, $.75, and, the price at which the Company
converted such shares, $.50, aggregated by the total shares issued. There was no
comparable item in the 1998 Quarter.
INCOME TAXES.
The provision for income taxes decreased by $179,900 due to a $449,700
decrease in pretax profits in the 1999 Period from the comparable period in 1998
Period. The effective tax rates for the 1998 and 1997 Quarters were 40%. No tax
benefit was recorded relating to the extraordinary interest charge as it is not
deductible for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES.
In the 1999 Period, $1,875 of cash was generated by operating
activities. This increase in operating funds resulted primarily from a decrease
in accounts receivable of $558,800; the add back of a non-cash extraordinary
charge of $277,000;a decrease in deferred taxes of $123,900 and a decrease in
prepaid and other assets, net, of $73,100. Offsetting these amounts was a net
loss in the 1999 Period of ($91,100); decreases in accounts payable and accrued
expenses of $785,300 and an increase in inventories of $155,700.
Net investing activities in the 1999 Period used cash of $15,600. The
Company collected $258,100 of notes receivable, which arose from the sale of its
discontinued operations in 1997, $9,200 of loans made to its officers, and
received $37,200 from the sale of assets. In the 1999 Period, the Company
purchased $320,200 of property, plant and equipment.
Financing activities in the 1999 Period used cash of $376,300. Funds
were used for payments of borrowing under the bank credit line of $334,900, note
payments to a related party of $42,700 and $14,700 for expenses in connection
with the note conversion described below and debt costs. Offsetting this amount
were $16,000 of funds received from the exercise of warrants into common shares.
As of June 30, 1999, there remained outstanding Class B warrants
exercisable for 187,000 shares at $.50 per share, which were originally
scheduled to expire February 1, 1999. On January 28, 1999, the Company extended
such expiration date to September 30, 1999. The Company's Common Stock is traded
on the Nasdaq SmallCap Market and, during the first days immediately preceding
August 5, 1999 was trading in the range of approximately $1.50 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
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
19
<PAGE>
warrants to purchase 1,662,000 shares of Common Stock (such warrants expired on
March 15, 1999 and are no longer outstanding), and paid accumulated interest on
the Notes of approximately $72,000. Certain officers and directors participated
in this transaction.
Forward and Koszegi Industries, Inc., a wholly-owned subsidiary of
Forward ("Koszegi"), established a new line of credit with a bank in April 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.
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 in compliance.
Amounts owed the bank at June 30, 1999 including contingent liability for
letters of credit were $1,334,600; there remained approximately $173,000 of
additional availability.
In September 1998, the Company commenced a plan which it believes will
streamline its operations and reduce its cost structure over time. The Company
announced a plan of restructuring, and recorded restructuring charges for its
fiscal year ended September 30, 1998, pursuant to which it closed its South
Bend, Indiana manufacturing operations on February 28, 1999, but continued to
provide required domestic manufacturing through a contractual arrangement with
MedCovers, Inc., of Raleigh, North Carolina. However, the vast majority of the
Company's orders are now manufactured overseas. Under the agreement, the Company
sold to MedCovers certain key production equipment, and is providing technical
support and quality assurance personnel at MedCovers factory. The Company also
uses other third party sources for such production as appropriate. The Company
incurred expenditures during the current quarter related to the plant shutdown,
which were accrued at September 30, 1998. Funds for such expenditures are being
paid from existing cash or cash generated by operations.
In addition, the Company renovated a building, which it owns, adjacent
to its former leased factory in South Bend, to house its remaining sales staff,
customer support and other administrative personnel who remain in Indiana. The
renovation, which was completed at the end of February 1999, at a cost of
approximately $100,000 was 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 evaluated 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 expended approximately $130,000 during fiscal 1999, encompassing the
cost of new hardware and software. Such amounts were paid from existing cash.
Hardware and software were installed during December 1998 and January 1999. The
Company has been incurring internal staff costs associated with training. Cost
of staff time is expensed as incurred, while cost of the new system is being
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 and a severance package totaling $350,000, of which $200,000 was paid on
January 1, 1999 and $150,000 is payable on the 15th month anniversary thereof.
Such amounts were and 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 1999 Quarter.
At June 30, 1999, there was no long-term debt and all installment note and
capital lease payments were made on a timely basis.
DEFERRED INCOME TAXES
The Company's balance sheet at June 30, 1999 includes $1,625,100 of
deferred income taxes as an asset. The Company was profitable in the 1999
Quarter, and in fiscal 1998, before restructuring charges associated with the
non-recurring costs of the shutdown of its South Bend plant, and in the 1998
Quarter. 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 June
30, 1999, the Company's stockholder's equity at such date of would have been
reduced by $1,625,100 to a
20
<PAGE>
stockholder's equity of $2,600,700 and the Company's working capital at June 30,
1999 would have been reduced by $122,700 from $1,945,700 to $1,822,900.
PART II. OTHER INFORMATION
ITEM 1. 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 and may file a separate counter suit against
Hollco for these and other charges to offset any claims of Hollco.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
21
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K
None.
************
22
<PAGE>
SIGNATURE
In accordance with to the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Dated: August 5, 1999
FORWARD SYSTEMS, INC.
(Registrant)
By: /s/ Philip B. Kart
--------------------------------
PHILIP B. KART
Principal Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED BALANCE SHEET AS OF JUNE 30, 1999 AND UNAUDITED STATEMENT
OF OPERATIONS FOR THE NINE MONTHS THEN ENDED.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 334,593
<SECURITIES> 0
<RECEIVABLES> 2,452,859
<ALLOWANCES> 104,800
<INVENTORY> 1,239,399
<CURRENT-ASSETS> 4,853,737
<PP&E> 604,206
<DEPRECIATION> 135,017
<TOTAL-ASSETS> 7,133,917
<CURRENT-LIABILITIES> 2,908,078
<BONDS> 0
61,030
0
<COMMON> 0
<OTHER-SE> 4,402,922
<TOTAL-LIABILITY-AND-EQUITY> 7,133,917
<SALES> 11,420,320
<TOTAL-REVENUES> 11,420,320
<CGS> 8,102,089
<TOTAL-COSTS> 8,102,089
<OTHER-EXPENSES> 3,024,873
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97,629
<INCOME-PRETAX> 309,767
<INCOME-TAX> 123,907
<INCOME-CONTINUING> 185,860
<DISCONTINUED> 0
<EXTRAORDINARY> (277,000)
<CHANGES> 0
<NET-INCOME> (91,140)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
