<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 December 31,
1998.
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)
275 West Hempstead Avenue, Hempstead, NY 11552
----------------------------------------------------
(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 January 22, 1999, 5,906,141 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
THREE MONTHS ENDED DECEMBER 31, 1998
CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Consolidated Balance Sheets
as of December 31, 1998 (Unaudited)
and September 30, 1998 3
Consolidated Statements of Income
(Unaudited) for the Three Months
ended December 31, 1998 and 1997 5
Consolidated Statements of Comprehensive Income
for the Three Months ended December 31, 1998 and 1997 6
Consolidated Statements of Cash Flows
(Unaudited) for the Three Months
ended December 31, 1998 and 1997 7
Notes to Form 10-QSB (Unaudited) 9
Item 2. Management's Discussions and Analysis 14
PART II. OTHER INFORMATION 18
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
2
<PAGE>
PART I. ITEM 1. FINANCIAL STATEMENTS
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------ -------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 492,133 $ 703,920
Accounts receivable, less allowance for doubtful
accounts of $110,800 and $110,800 2,182,677 2,906,843
Inventories - net 1,219,383 1,083,662
Notes and loans receivable - current portion 261,067 350,822
Notes and loans receivable - officers - current portion 28,490 32,311
Prepaid expenses and other current assets 560,434 343,536
Deferred income taxes 193,991 246,632
----------- ------------
Total current assets 4,938,175 5,667,726
----------- ------------
PROPERTY, PLANT AND EQUIPMENT - net 287,789 187,454
----------- ------------
OTHER ASSETS:
Deferrred income taxes 1,502,395 1,502,395
Note receivable - net of current portion 328,267 345,766
Property and equipment held for sale 68,033 154,200
Notes and loans receivable - officers - net of
current portion 83,961 83,962
Deferred debt costs 62,774 85,161
Other assets 60,979 59,412
----------- ------------
2,106,409 2,230,896
----------- ------------
$ 7,332,373 $ 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>
December 31, September 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1998
------------ -------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Borrowings under credit line $ 490,615 $ 1,244,103
Accounts payable 1,247,731 1,215,572
Convertible notes payable -- 554,000
Notes payable - related party 27,524 42,670
Accrued expenses and other current liablilites 1,129,915 1,218,574
Accrued severance to officer 346,704 350,000
----------- -----------
Total current liabilities 3,242,489 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 6,071,031 shares and 4,963,031 shares
(including 164,890 held in treasury) 60,710 49,630
Paid-in capital 7,364,123 6,551,703
Accumulated deficit (3,082,386) (2,884,346)
Comprehensive income adjustment (14,450) (17,717)
----------- -----------
4,327,997 3,669,270
Less: Cost of shares in treasury 238,113 238,113
----------- -----------
Total stockholders' equity 4,089,884 3,461,157
=========== ===========
$ 7,332,373 $ 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
December 31,
----------------------------------
1998 1997
------ ------
<S> <C> <C>
NET SALES $ 3,963,133 $ 3,392,854
COST OF GOODS SOLD 2,777,820 2,177,090
----------- -----------
GROSS PROFIT 1,185,313 1,215,764
----------- -----------
OPERATING EXPENSES:
Distribution 8,587 6,833
Selling 370,493 419,174
General and administration 651,503 687,723
----------- -----------
1,030,583 1,113,730
----------- -----------
INCOME FROM OPERATIONS 154,730 102,034
----------- -----------
OTHER INCOME (DEDUCTIONS):
Interest expense (46,339) (76,500)
Interest expense - related parties (950) (6,030)
Interest income 7,996 36,017
Rental income - net -- (60,730)
Other income - net 16,165 672,809
----------- -----------
(23,128) 565,566
----------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 131,602 667,600
PROVISION FOR INCOME TAXES 52,641 267,040
----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM 78,961 400,560
EXTRAORDINARY ITEM:
Non-cash interest charge upon conversion
of promissory notes (net of income tax
benefit of $ -0-) (Note 4) (277,000) --
----------- -----------
NET INCOME (LOSS) $ (198,039) $ 400,560
=========== ===========
NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE:
Basic:
Income before extraordinary item $.02 $.09
Extraordinary item (.05) .00
----- ----
$(.03) $.09
===== ====
Diluted:
Income before Extraordinary Item $.02 $.07
Extraordinary item (.05) .00
----- ----
$(.03) $.07
===== ====
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 5,167,474 4,333,741
========= =========
DIVIDENDS NONE NONE
</TABLE>
The accompanying notes are an integral part of these
financial statements.
5
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended
December 31,
------------------------------
1998 1997
------ ------
NET INCOME (LOSS) $(198,039) $ 400,560
COMPREHENSIVE INCOME ADJUSTMENTS:
Foreign currency translation (14,450) --
--------- ---------
COMPREHENSIVE INCOME (LOSS) $(212,489) $ 400,560
========= =========
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>
Three Months Ended
December 31,
---------------------------------
1998 1997
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $(198,039) $ 400,560
Adjustments to reconcile net income to net cash provided by (used in)
continuing operations:
Extraordinary interest charge 277,000 --
Gain on sales of property and equipment -- (574,236)
Depreciation and amortization 9,375 36,909
Amortization of deferred debt costs 22,387 24,014
Deferred taxes 52,641 267,040
Non-cash compensation -- 6,250
Changes in assets and liabilities:
Accounts receivable 724,166 481,949
Inventories (135,721) (405,119)
Prepaid expenses and other current assets (130,731) 36,616
Other assets (1,467) (16,433)
Accounts payable 32,159 (774,370)
Accrued expenses and other current liabilities (88,659) 47,782
Accrued severance to officer (3,296) --
--------- ----------
NET CASH (USED IN) PROVIDED BY OPERATIONS 559,815 (469,038)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of property -- 643,830
Proceeds from notes and loans receivable 107,254 541,788
Proceeds from collections from officers 3,822 15,000
Purchases of property, plant and equipment (109,811) (61,719)
--------- ----------
NET CASH PROVIDED BY
INVESTING ACTIVITIES 1,265 1,138,899
--------- ----------
</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>
Three Months Ended
December 31,
----------------------------------
1998 1997
------ ------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) short-term borrowings (753,488) (149,667)
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 (15,146) --
Proceeds from issuances of stock -- 292,500
Deferred offering costs (7,500) (19,739)
Deferred debt costs -- (13,159)
---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (776,134) (1,162,814)
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES 3,267 --
---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (211,787) (492,953)
CASH AND CASH EQUIVALENTS - beginning 703,920 1,365,198
---------- ----------
CASH AND CASH EQUIVALENTS - ending $ 492,133 $ 872,245
========== ==========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 19,215 $ 230,380
Income taxes $ 10,000 $ 529
SCHEDULE OF NON-CASH ACTIVITES:
Discount on repayment of mortgage debt $ -- $ 55,529
Offset of deferred offering costs to paid in capital $ -- $ 86,681
Warrants issued for services rendered $ -- $ 6,250
Issuance of common stock upon conversion of $ 554,000 $ --
long-term debt
Issuance of promissory notes upon closing of $ -- $ 185,000
Private Placement Units
Sale of property and equipment held for sale $ 86,167 $ --
</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
THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(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 December 31, 1998 and 1997. 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
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 new
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
December 31, 1998 amounts outstanding were $490,600. In addition, the
Company was contingently liable under letters of credit in the amount
of $582,600. The credit agreement provides for certain financial
covenants. Forward and Koszegi were not in compliance at December 31,
1998. The bank has waived compliance with such convenants.
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,
9
<PAGE>
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 and Private Placement Warants to purchase 1,662,000 shares of
Common Stock. 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:
December 31, 1998 September 30, 1998
----------------- ------------------
(Unaudited)
Raw materials $ 169,808 $ 101,859
Work in process 49,045 119,095
Finished goods 1,000,580 862,708
---------- ----------
$1,219,383 $1,083,662
========== ==========
6. SALE OF BUILDING
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.
7. SUBSEQUENT EVENTS
The Company received a letter from the staff of the Nasdaq Stock
Market dated January 27, 1999, notifying the Company that it is in
compliance with the bid price requirement for continued listing on the
Nasdaq SmallCap Market.
10
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
NUMERATOR
Income from continuing operations:
Income from continuing operations: $ 78,961 $ 400,560
Less: Preferred dividends -- --
----------- ----------
Income available to common stockholders
used in basic EPS 78,961 BASIC 400,560
Impact of potential common shares:
Convertible debt -- 8,310
----------- ----------
Income available to common stockholders after
assumed conversions of dilutive securities $ 78,961 DILUTED $ 408,870
=========== ==========
Loss from extraordinary item $ (277,00) $ --
=========== ==========
DENOMINATOR
Weighted average number of common shares
outstanding - See schedule 5,167,474 BASIC 4,333,141
Impact of potential common shares:
Stock options and warrants 91,016 263,410
Convertible debt N/A 1,108,000
----------- ----------
5,258,490 DILUTED 5,704,551
=========== ==========
BASIC EPS
Income from continuing operations $ .02 $ 0.09
Extaordinary Item (.05) 0.00
------ -------
$ (.03) $ 0.09
====== =======
DILUTED EPS
Income from continuing operations $ .02 $ 0.07
Extraordinary Item (.05) 0.00
------ -------
$ (.03) $ 0.07
====== =======
</TABLE>
11
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
---------------------------
1998 1997
---- ----
<S> <C> <C>
CALCULATIONS
1. Stock Options
Treasury Stock Method Applied to Stock Options
Sale of common stock
Total options and warrants outstanding 219,000 1,271,250
Average price $0.50 $1.84
--------- -----------
Total $ 109,500 $ 2,335,469
========= ===========
Repurchase of common stock
Proceeds $ 109,500 $ 2,335,469
Average stock price $0.86 $2.32
--------- -----------
Shares repurchased 127,984 1,007,840
========= ===========
Net increase in shares
Shares sold 219,000 1,271,250
Shares repurchased 127,984 1,007,840
--------- -----------
Increase in shares 91,016 263,410
========= ===========
2. Convertible debt
Terms:
Interest rate 10%
Par $ 10,000
Convertible into shares 20,000
Conversion price N/A
# of units $ 55
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
===========
</TABLE>
12
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE
Computation of Weighted Average Number of Common Shares Outstanding
DECEMBER 31, 1998
-----------------
<TABLE>
<CAPTION>
Weighted
Dates Shares Fraction Average
Outstanding Outstanding of Period Shares
----------- ----------- --------- ------
<S> <C> <C> <C>
October through November 4,798,141 2/3 3,198,761
Common stock issued in connection with
conversion of private placement debt
in December 1,108,000
---------
December 5,906,141 1/3 1,968,714
---------
Weighted Average Shares 5,167,474
=========
</TABLE>
DECEMBER 31, 1997
-----------------
<TABLE>
<CAPTION>
Weighted
Dates Shares Fraction Average
Outstanding Outstanding of Period Shares
----------- ----------- --------- ------
<S> <C> <C> <C>
October through November 4,138,141 2/3 2,758,761
Common stock issued in connection
with private placement in December 585,000
---------
December 4,723,141 1/3 1,574,380
---------
Weighted Average Shares 4,333,141
=========
</TABLE>
13
<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, 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 months ended December 31, 1998,
and the three months ended December 31, 1997.
THREE MONTHS ENDED DECEMBER 31, 1998 (THE "1998 QUARTER") COMPARED TO
THREE MONTHS ENDED DECEMBER 31, 1997 (THE "1997 QUARTER").
The 1998 Quarter reflected a net loss of ($198,000) compared to net
income of $400,600 in the 1997 Quarter. However, after excluding certain
non-recurring items, net income improved by nearly $80,000. Excluding the gain
on the sale of a building in the 1997 Quarter of $401,400, the operations
generated a net loss of approximately $800. In the 1998 Quarter, operations
generated net income of $79,000 prior to the extraordinary non-cash charge of
$277,000 described below. Basic earnings per share from continued operations
decreased from $.09 in the 1997 Quarter to $.02 in the 1998 Quarter, while
diluted earnings per share from continuing operations decreased from $.07 in
the 1997 Quarter to ($.03) in the 1998 Quarter.
REVENUES.
Net sales increased $570,200 (17%) to $3,963,100 in the 1998 Quarter,
from $3,392,900 in the 1997 Quarter. The increase is attributable to growth in
business from both existing and new customers.
OPERATING INCOME.
Consolidated pretax income from continuing operations decreased by
$536,000 to a profit of $131,600 in the 1998 Quarter, from $667,600 in the 1997
Quarter. The decrease is wholly related to the gain on the sale of the
Company's building, representing $669,000 before tax, in the 1997 Quarter.
Excluding this item, the comparison would show a pretax operating loss of
$1,400 in the 1997 Quarter compared with pretax operating income in the 1998
Quarter of $131,600, an increase of $133,000. The increase in pretax profits
relates primarily to decreases in selling expenses of $48,700, general and
administrative expenses of $36,200, and other income and deductions of $80,300,
as described below. These expense reductions were offset by gross profit, which
decreased $30,500 to $1,185,300 in the 1998 Quarter from $1,215,800 in the 1997
Quarter, and the gross margin percentage decreased from 36% to 30%. The gross
margin percentage in 1997 was the result of certain adjustments and
non-recurring items associated with discontinued operations. The gross profit
in 1998 is more indicative of margin percentages on a continuing basis.
Selling expenses decreased $48,700 (12%) from $419,200 in the 1997
Quarter to $370,500 in the 1998 Quarter due to lower sales commissions. The
ratio of selling expenses to net sales declined from 12% to 9%, in part because
of lower expenses as well as an increase in revenues.
General and administrative expenses decreased as a percent of net
sales, to 16% in the 1998 Quarter from 20% in the 1997 Quarter and the dollar
amount of expenses decreased $36,200 (6%) to $651,500 in the 1998 Quarter from
$687,700 in the 1997 Quarter. The decrease is primarily related to reductions
in professional fees and bank fees which were offset in part by higher payroll
expenses.
OTHER INCOME (DEDUCTIONS).
Total interest expenses decreased by $35,200 to $47,300 in the 1998
Quarter from $82,500 in the 1997 Quarter. The decrease was due to lower
interest rates, better collections of accounts receivable resulting in lower
outstanding bank borrowings, and the repayment of the mortgage on the Company's
building in the 1997 Quarter.
14
<PAGE>
The Company's rental building in Brooklyn, New York was partially
leased during the 1997 Quarter and was sold in December 1997. See discussion
below. As a result, rental income - net decreased from a loss of ($60,700) in
the 1997 Quarter to zero in the 1998 Quarter.
Interest and other income - net decreased $684,600 to $24,200 in the
1998 Quarter from the $708,800 1997 Quarter. The decrease is primarily related
to the gain on the sale of the Brooklyn building of $669,000, recorded in the
1997 Quarter.
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 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 1997 Quarter.
INCOME TAXES.
The provision for income taxes decreased by $214,000 due to a $536,000
decrease in pretax profits in the 1998 Quarter from the comparable period in
1997 Quarter. 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 1998 Quarter, $559,800 of cash was generated by operating
activities. This increase in operating funds resulted primarily from a decrease
in accounts receivable of $724,200 and the add back of a non-cash extraordinary
charge of $277,000. Offsetting these amounts were a net loss in the 1998
Quarter of ($198,000); a decrease in accrued expenses of $88,700; an increase
in inventories $135,700; and an increase in prepaid and other assets $130,700.
Net investing activities in the 1998 Quarter provided cash of $1,300.
The Company collected $107,300 of notes receivable, which arose from the sale
of its discontinued operations in 1997 and collected $3,800 of loans made to
its officers. In the 1998 Quarter, the Company purchased $109,800 of property,
plant and equipment.
Financing activities in the 1998 Quarter used cash of $776,100. Funds
were used for payments of borrowing under the bank credit line of $753,500,
note payments to a related party of $15,100 and $7,500 for expenses in
connection with issuing 1,108,000 shares of Common Stock, described below.
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 December 31,
1998, there remained outstanding warrants exercisable for 219,000 shares at
$.50 per share, which were scheduled to expire February 1, 1999. On December
30, 1998, the Company had amended the terms of such warrants to reduce the
exercise price to $0.50 and extend the expiration date to February 1, 1999. On
January 28, 1999, the Company extended such expiration date to September 30,
1999. In addition, as of December 31, 1998, there remained outstanding 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 January 25, 1999 was
trading in the range of approximately $1.20 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
15
<PAGE>
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.
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. 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
December 31, 1998 including contingent liability for letters of credit were
$1,073,000; there remained approximately $579,000 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. The Company
announced a plan of restructuring, and recorded restructuring charges for its
fiscal year ended September 30, 1998, pursuant to which it will close its
manufacturing operations by February 28, 1999, but continue to provide any
required domestic manufacturing through a contractual arrangement with
MedCovers, Inc., of Raleigh, North Carolina. The vast majority of its orders
are now manufactured overseas. 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 is
incurring expenditures 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 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 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 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 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 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 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
Quarter. At December 31, 1998, there was no long-term debt and all installment
note and capital lease payments were made on a timely basis.
16
<PAGE>
DEFERRED INCOME TAXES.
The Company's balance sheet at December 31, 1998 includes $1,696,400
of deferred income taxes as an asset. The Company was profitable in the 1998
Quarter, before the extraordinary charge described above, and in fiscal 1998,
before restructuring charges associated with the non-recurring costs of the
shutdown of its South Bend plant, and in the 1997 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 December 31, 1998, the Company's
stockholder's equity at such date of $4,089,900 would have been reduced by
$1,696,400 to a stockholder's equity of $2,393,500 and the Company's working
capital at December 31, 1998 would have been reduced by $194,000 from
$1,722,600 to $1,528,600.
17
<PAGE>
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
On December 30, 1998, the Company amended the terms of its
outstanding Class B Public Warrants to reduce the exercise price to
$0.50 and extend the expiration date to February 1, 1999. On January 28,
1999, the Company extended such expiration date to September 30, 1999.
During the Company's fiscal year ended September 30, 1997 and in
December 1997, the Company consummated its 1997 Private Placement of
units ("Units"), each unit comprised of (i) 30,000 shares of Common
Stock, (ii) one warrant to purchase up to 30,000 shares of Common Stock
at $4.00 per share (a "Private Placement Warrant") and (iii) one
unsecured convertible promissory 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. An aggregate 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 $169,500 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 the Notes, of approximately $72,000.
On December 23, 1997, the Company filed a Certificate of
Amendment to its Certificate of Incorporation so as to effectuate a
one-for-two reverse stock split of its issued and outstanding Common
Stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended December 31, 1998, the Company filed one
Current Report of Form 8-K, dated December 30, 1998, reporting on Item 5
with respect to the extension of the expiration date of the Class B
Warrants to February 1, 1999 and reduction of exercise price to $.50.
18
<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: February 1, 1999
FORWARD SYSTEMS, INC.
(Registrant)
By: /s/ Philip B. Kart
------------------------------
PHILIP B. KART
Principal Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED BALANCE SHEET AS OF DECEMBER 31, 1998 AND UNAUDITED
STATEMENT OF OPERATIONS FOR THE THREE MONTHS THEN ENDED
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 492,133
<SECURITIES> 0
<RECEIVABLES> 2,293,477
<ALLOWANCES> 110,800
<INVENTORY> 1,219,383
<CURRENT-ASSETS> 4,938,175
<PP&E> 408,148
<DEPRECIATION> 120,359
<TOTAL-ASSETS> 7,332,373
<CURRENT-LIABILITIES> 3,242,489
<BONDS> 0
0
0
<COMMON> 60,710
<OTHER-SE> 4,029,174
<TOTAL-LIABILITY-AND-EQUITY> 7,332,373
<SALES> 3,963,133
<TOTAL-REVENUES> 3,963,133
<CGS> 2,777,820
<TOTAL-COSTS> 2,777,820
<OTHER-EXPENSES> 1,030,583
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,289
<INCOME-PRETAX> 131,602
<INCOME-TAX> 52,641
<INCOME-CONTINUING> 78,961
<DISCONTINUED> 0
<EXTRAORDINARY> (277,000)
<CHANGES> 0
<NET-INCOME> (198,039)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
