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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
<TABLE>
<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934:
</TABLE>
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
<TABLE>
<C> <S>
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934:
</TABLE>
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 0-6669
FORWARD INDUSTRIES, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C>
NEW YORK 13-195072
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1801 GREEN ROAD SUITE E. POMPANO BEACH, FL 33064
(Address of principal executive offices) (Zip Code)
</TABLE>
(954) 360-6420
(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
(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. / /
The issuer's revenues for its most recent fiscal year were: $14,410,035.
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 $5,901,616 based on the average of the closing bid price
($.97) and closing asked price ($.94) as reported on the NASDAQ SmallCap Market
on December 21, 2000.
As of December 21, 2000, 6,084,141 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 Company's 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;
both were manufactured by the Company. During recent years, Koszegi Industries
(the carrying case business) progressively became the more 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, to focus on the carrying case business.
The Company had been producing soft-sided carrying cases in its South Bend,
Indiana manufacturing plant and overseas through contract-manufacturers.
However, with the general 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 on February 28, 1999 and eliminate the related costs of domestic
manufacture. See "Production and Materials."
The Company consolidated its sales and customer service operations from
South Bend, Indiana, and its executive offices from Westbury, New York, to a new
office at 1801 Green Road in Pompano Beach, Florida in July of 2000.
PRODUCTS
CUSTOM CARRYING CASES. The Company designs and markets custom soft-sided
carrying cases, bags, and clips from leather, nylon, vinyl and other synthetic
fabrics (the "carrying cases business") through its wholly-owned subsidiary,
Koszegi Industries, Inc. ("Koszegi"). These carrying cases and bags are utilized
for transporting portable electronic products such as cellular telephones,
medical instruments, computers, and other hand held devices. The carrying cases
business accounted for all of the Company's net sales in the fiscal years ended
September 30, 2000 and September 30, 1999 ("Fiscal 2000" and "Fiscal 1999",
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."
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 2000, approximately 20% of the Company's sales were made
through five independent sales representative organizations that receive a
commission averaging 5% of
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the net sales made by them. The balance of sales were made by Company personnel.
In Fiscal 2000 and Fiscal 1999, approximately 55% and 70% of sales,
respectively, were made to customers outside of the United States (approximately
30% in Fiscal 1998). Since Fiscal 1998 the Company has emphasized its marketing
efforts outside the United States and expects that those sales will continue as
the greater percentage of its business in the near term. The Company has no
long-term agreements with any of its customers. One of the Company's customers,
together with its respective international affiliates, accounted for
approximately 50% of the Company's sales in Fiscal 2000, down from 60% in Fiscal
1999. Another of the Company's customers, together with its respective
international affiliates, accounted for approximately 17%, of the Company's net
sales during Fiscal 2000. The loss 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 140 active 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 hard-shell 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
are large retail chain computer outlets, large, direct mail order houses small
computer equipment manufacturers and resellers, and original equipment
manufacturers. The Company also redirected its strategic selling efforts for its
Terrapin-TM- computer case line through the Internet. It announced the launch of
a brand store at Egghead Inc. "Egghead" (formerly Onsale) through which its
cases have been offered for sale online. Egghead is a leading on-line retailer
providing cost-competitive prices and service through the Internet. The Company
intends to renew the Terrapin-TM- trademark which it holds through December 31,
2002.
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, 2000, three of the Company's largest customers and their
international affiliates accounted for approximately 70% of the Company's
accounts receivable, a single customer accounting for approximately 80% at
September 30, 1999. Any failure of such customers to pay the sums they owe to
the Company when due would have a material adverse effect on the Company.
PRODUCTION AND MATERIALS
The principal materials used in the manufacture of the Company's products
are vinyl, nylon, leather, metal and plastic parts (such as clips, buckles,
loops, and hinges and other hardware), foam padding and cardboard, 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;
however, there are adequate available alternative sources of supply for all of
its materials.
Manufacturing of custom carrying cases generally consists of die cutting
fabrics, principally leather and vinyl, 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 more than 90% of the
Company's carrying cases
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in Fiscal 2000. The Company does not have 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, Indiana
manufacturing facility declined due to cost competition from overseas suppliers.
As a result, the Company was no longer able to 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 MedCovers Inc., in Raleigh,
North Carolina, would produce requiring domestic manufacture under contractual
agreement between the two parties. A second contract manufacturer was added
during Fiscal 1999 to support domestic production. The Company sold to MedCovers
Inc. specialized equipment utilized in the manufacture of its products and
provided training in aspects of its production. The Company used MedCovers Inc.
in Fiscal 2000 to augment its domestic production needs.
During Fiscal 2000, one of the Company's foreign contractors produced
approximately 30% of the Company's carrying cases, approximately 40% and 45% in
Fiscal 1999 and Fiscal 1998, respectively. 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 expanded the number of foreign contractors it
uses to reduce such reliance. Currently, there are four such foreign contractors
regularly producing products for the Company.
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. This facility inspects all outsourced production and
during Fiscal 1999, received ISO 9002 quality certification.
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. 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, competitive pricing policies, reliable product delivery and
quality.
EMPLOYEES
At September 30, 2000, the Company had approximately 29 full-time employees,
of whom 4 are employed in executive capacities, 6 are employed in administrative
and clerical capacities, 15 are employed in sales and sales support capacities
and the balance in quality control and warehouse capacities. From time to time,
use is made of full-time temporary workers, there were 10 such temporary workers
at September 30, 2000, primarily as quality control inspectors in its Hong Kong
quality control facility. The number of temporary employees varies, depending on
production requirements. 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 Koszegi, a wholly owned subsidiary, formerly leased
manufacturing and office space at 702 South Chapin Street, South Bend, Indiana,
(the "Chapin Street property"), 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, the Company's last full year at the
premises, on an accrual basis. The lease was not renewed upon expiration. See
"Production and Materials."
The subsidiary owns a 7,000 square foot building at 713 Scott Street, South
Bend, Indiana, (the "Scott Street property") which it purchased in 1990 for
$125,000. The Company's sales, customer service and selected administrative
staff occupied this space subsequent to the termination of its lease at the
Chapin Street property until July 2000.
In July 2000, operations at the Scott Street property, and the executive
functions that were being performed in leased office space at 400 Post Ave, in
Westbury, New York, were consolidated into leased office space located at 1801
Green Road, Suite E, in Pompano Beach, Florida. As a result of the
consolidation, the Scott Street property was vacated and the Westbury, New York
lease terminated. The Scott Street property is presently for sale.
The Company, through a Hong Kong subsidiary, leases warehouse and office
space in Hong Kong at which its quality control inspection facilities are
located, at a monthly rental of approximately $7,500 (pursuant to a lease
running through May 2002).
The Company also rents on minor office space in Copenhagen, Denmark.
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 which it alleged that it was owed for cases which
it manufactured under order from the Company. The Company asserted a
counterclaim alleging offsets due to product defects and rejects and additional
costs incurred by the Company. A consent order settling the matter was executed
on November 7, 2000.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders in the fourth
quarter for the fiscal year ended September 30, 2000.
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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 Company's common stock is traded under
the symbol "FORD". 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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<CAPTION>
COMMON STOCK
-----------------------------------------
FISCAL 2000 FISCAL 1999
------------------- -------------------
HIGH BID LOW BID HIGH BID LOW BID
-------- -------- -------- --------
<S> <C> <C> <C> <C>
First Quarter............................................. $3.38 $2.00 $1.06 $ .63
Second Quarter............................................ 3.97 2.88 1.81 .69
Third Quarter............................................. 3.13 1.50 1.81 1.00
Fourth Quarter............................................ 2.25 1.00 3.56 1.25
</TABLE>
On December 21, 2000, the closing bid quotation for the Common Stock was
$.94 per share.
MARKET FOR THE CLASS B WARRANTS. The Company's Class B Warrants were traded
in the over-the-counter market from September 13, 1995 to their expiration on
September 30, 1999; these securities were thinly traded. 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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<CAPTION>
CLASS B WARRANTS
-----------------------------------------
FISCAL 2000 FISCAL 1999
------------------- -------------------
HIGH BID LOW BID HIGH BID LOW BID
-------- -------- -------- --------
<S> <C> <C> <C> <C>
First Quarter............................................. -- -- $ .05 $.05
Second Quarter............................................ -- -- .10 .10
Third Quarter............................................. -- -- .50 .13
Fourth Quarter............................................ -- -- 1.06 .94
</TABLE>
HOLDERS OF COMMON STOCK. On December 7, 2000, there were approximately 220
holders of record of the Company's Common Stock.
HOLDERS OF CLASS B WARRANTS. These Warrants expired on September 30, 1999.
Prior to their expiration, holders converted substantially all of the Class B
Warrants into Common Stock.
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 any
future 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.
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
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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. The debt was
discounted by $333,408 and the discount amortized as interest expense over the
lives of the notes. 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. In connection with the
conversion of the debt into equity, the Company recorded a non-cash interest
charge of $220,592 to recognize the beneficial conversion feature associated
with the conversion. Certain officers and directors of the Company participated
in this transaction; see Item 12, "Certain Relationships and Related
Transactions." The Private Placement Warrants expired on March 15, 1999.
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 fiscal years ended September 30, 2000, 1999 and
1998. 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, 2000 ("FISCAL 2000") COMPARED WITH TWELVE
MONTHS ENDED SEPTEMBER 30, 1999 ("FISCAL 1999").
NET INCOME
The Company's net income decreased by approximately $754,800 to a net profit
of $92,100 in Fiscal 2000 from a net profit of $846,900 in Fiscal 1999. Fiscal
1999 included a nonrecurring, non-cash, charge to earnings in the amount of
$220,600 as described below. Basic earnings per share decreased from $.14 in
Fiscal 1999 to $.02 in Fiscal 2000. Diluted earnings per share decreased from
$.14 in Fiscal 1999 to $.01 in Fiscal 2000. The decrease in net income is due
primarily to lower revenues as discussed below.
REVENUES
Fiscal 2000 sales declined by approximately $6.1million (30%) to $14.4
million as compared to $20.5 million in Fiscal 1999. The sales decline occurred
entirely in the fourth quarter of Fiscal 2000 and can be attributed to lower
sales to the Company's largest customer and its affiliates. The customer
accounted for approximately $7.2 million of sales in the fourth quarter of
Fiscal 1999, as compared to $200,000 of sales in the fourth quarter of Fiscal
2000. Sales to this customer represented approximately 50% and 60% of the
Company's revenue for the Fiscal 2000 and Fiscal 1999 respectively.
The customer participates in the wireless telecommunications industry and
demand for the Company's products can vary significantly depending on the
customer's introduction of new products,
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production schedules and inventory levels. The Company believes that short-term
variations from its single largest customer should not be viewed as indicative
of a long-term trend and uneven demand for the Company's products is inherent in
the customer's business. The Company has received new orders from this customer
of approximately $2 million that it expects to ship in the first quarter of
Fiscal 2001.
The Company believes that it can level demand for its products, increase
gross profit, and diversify its customer base by partnering with its major
customers to actively market and distribute the Company's products via the
customer's distribution channels. The company intends to vigorously pursue such
opportunities.
INCOME FROM OPERATIONS
Consolidated income from continuing operations before tax decreased by
$1,522,600 to a profit of $131,700 in the Fiscal 2000 from a profit of
$1,654,300 in Fiscal 1999. The decrease is directly related to the decline in
sales as described above and the related decrease in gross margin.
Gross profit decreased $1,771,700 to $4,473,700 in Fiscal 2000 from
$6,245,400 in Fiscal 1999. The gross profit percent increased in Fiscal 2000 to
31%, up from 30%. The decrease in absolute dollars is attributable to the lower
sales described above. The increase in gross margin percent is attributable to
better prices obtained from the Company's foreign suppliers as a result of the
Company's supplier diversification efforts.
Selling expenses increased by $74,700 (4%) to $1,865,700 in Fiscal 2000 from
$1,791,000 in the prior period. The ratio of selling expenses to net sales
increased to 13% in Fiscal 2000 from 9% in the Fiscal 1999 due to lower sales.
General and administrative expenses decreased by $574,900 (21%) in Fiscal
2000 from $2,800,000 in Fiscal 1999 to $2,225,100. The decrease is primarily
attributable to performance related bonus expenses in the amount of $420,000
that were incurred in Fiscal 1999, whereas no such expenses were incurred in
Fiscal 2000. As a percentage of sales, the general and administrative expenses
increased to 15% in Fiscal 2000 from 14% in the prior period due to lower sales
volume.
In Fiscal 2000, the Company expensed relocation charges of approximately
$251,100 associated with consolidating the South Bend, Indiana and Westbury, New
York Offices. No similar amounts were incurred in Fiscal 1999.
OTHER INCOME (DEDUCTIONS)
Total interest expense decreased by $233,300 to $104,300 in Fiscal 2000 from
$337,600 in Fiscal 1999. The decrease was primarily caused by a non-cash,
nonrecurring charge in the amount of $220,600 that was recorded as interest
expense in Fiscal 1999. The charge represents the beneficial conversion feature
associated with converting the Company's debt into equity in December of 1998.
INCOME TAXES
In Fiscal 2000, the provision for income taxes decreased by $339,900 to
$55,100 from $395,000 in Fiscal 1999 due to lower earnings.
TWELVE MONTHS ENDED SEPTEMBER 30, 1999 ("FISCAL 1999") COMPARED WITH TWELVE
MONTHS ENDED SEPTEMBER 30, 1998 ("FISCAL 1998").
NET INCOME
The Company's net income increased from a net loss of $1,328,700 in Fiscal
1998 to a profit of $846,900 in Fiscal 1999, an increase of $2,185,600.
Excluding a non-recurring, non-cash, interest charge
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of $220,600 in Fiscal 1999 described below. Basic and diluted earnings per share
increased from a loss of $.29 to a profit of $.14 in Fiscal 1999.
REVENUES
In Fiscal 1999 net sales increased $7,524,300 (58%) to $20,553,200, from
$13,028,900 in Fiscal 1998. During the fourth quarter of Fiscal 1999, revenues
were approximately $9.1 million, representing 44% of the total Fiscal 1999
revenues. The increase in revenues for this quarter, over the prior Fiscal 1998
fourth quarter, was attributable to demand from the Company's major customer
that participates in the wireless telecommunications industry. The increase is
attributable specifically to the Company's expansion efforts in its European
operations and customer accounts.
OPERATING INCOME
Consolidated income from continuing operations before tax increased by
$2,917,000 to a profit of $1,654,300 in Fiscal 1999 from a loss of $1,262,700 in
Fiscal 1998. The increase related primarily to growth in sales as described
above and the related increase in gross margin. In addition, during Fiscal 1998
the Company recorded 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 former Chief Executive Officer.
Gross profit increased by $2,567,600 to $6,245,400 in Fiscal 1999 from
$3,677,800 in Fiscal 1998. The gross profit percentage increased to 30% in
Fiscal 1999 from 28% in Fiscal 1998. The increase in absolute dollars was
attributable to higher sales described above, while the increase in margin
percentage was attributable to the reduction in, the Company's fixed costs
associated with the plant restructuring, which occurred in Fiscal 1998.
Selling expenses increased by $351,300 (24%) to $1,791,000 in Fiscal 1999
from $1,439,700 in Fiscal 1998. However, the ratio of selling expenses to net
sales declined to 9% in Fiscal 1999 from 11% in Fiscal 1998. The increase in
selling expenses in absolute dollars was primarily the result of the Company's
higher investment in the European sales effort, including salaries and manpower,
travel expense, bonus based on performance, warehousing, rent and recruitment
costs.
General and administrative expenses decreased as a percentage of net sales
to 14% in Fiscal 1999 from 17% in the 1998 Period, while the dollar amount
increased $546,600 (24%) to $2,800,000 in Fiscal 1999 from $2,253,400 in Fiscal
1998. The increase in the general and administrative expenses related primarily
to compensation associated with the Company's senior management, and
particularly to bonuses, which were predicated on operating performance
measures.
Restructuring charges of $897,400 and officer's severance of $350,000 were
incurred in the Fiscal 1998 in connection with the shutdown of the Company's
South Bend, Indiana production facility. No similar amounts were incurred in
Fiscal 1999.
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OTHER INCOME (DEDUCTIONS)
Total interest expense decreased by $192,200 to $337,600 in Fiscal 1999 from
$589,000 in Fiscal 1998. The decrease was due to lower interest rates, lower
outstanding bank borrowings due to improved collections of accounts receivable,
conversion of notes payable into common stock in Fiscal 1999 as discussed below,
and the repayment of the mortgage on the Company's building in December, 1997.
Interest and other income--net decreased by $839,500 in Fiscal 1999 from
income of $766,400 in Fiscal 1998 to the expense of $73,100. The Company
recorded a pretax gain on the sale of its Brooklyn, New York building of
approximately $669,000 in Fiscal 1998, accounting for the primary portion of the
difference.
INCOME TAXES
In Fiscal 1999 the provision for income taxes increased by $114,900 to
$395,000 from $280,100 due to higher earnings, and was offset, in part, by a
reduction in the valuation allowances for deferred tax assets. The effective tax
rate for Fiscal 1999 was 26%.
CONVERSION OF PROMISSARY NOTES INTO COMMON STOCK
On December 4, 1998 the Company converted $554,000 of its promissory notes
into 1,108,000 shares of its common stock. In connection with this conversion,
the Company recorded a non-cash, interest charge of approximately $220,600. This
amount represents a beneficial conversion feature and was calculated as the
difference between the price at which the Company converted such shares, ($.50)
and the market price of the Company's stock on the date the debt was issued
($1.81 weighted averaged), aggregated by the total shares issued. Current
accounting rules limit the amount of the beneficial conversion feature to the
face value of the notes ($554,000), less the amount of discount on the notes
previously recognized ($333,400).
LIQUIDITY AND CAPITAL RESOURCES
In Fiscal 2000, $715,800 of cash was generated by operating activities. This
increase in operating funds resulted primarily from increased collection of
accounts receivable of $2,675,800, and $135,000 of in lower inventory levels and
$92,100 in income. Offsetting these amounts was a decrease in accounts payable
of $1,516,600 and a decrease in accrued liabilities of $795,300. Credit terms to
customers are generally net thirty days from shipment of a product. In certain
situations, however, the Company may warehouse inventory at customer specified
locations to expedite delivery and invoice the customer upon issuance from the
warehouse.
Net investing activities in Fiscal 2000 used cash of $385,900. The Company
collected $210,900 of notes receivable but that amount was entirely offset by
loans to officers, net of collections on those loans, of $334,700 and the
purchase of property plant and equipment of $262,600.
Financing activities in Fiscal 2000 used cash of $709,500. Funds were used
for repayment of short term borrowings in the amount of $995,900 and the
repurchase of 17,500 shares of the Company's Common Stock in open market
transactions, aggregating a cost of $54,500. Offsetting these amounts were
additional borrowings under the Company's line of credit in the amount of
$350,000.
In January 2000, the Company established a new credit facility with a bank
that provides for a maximum line of credit of $5 million, including letters of
credit. On February 1, 2000 the direct borrowings and acceptances from a former
credit facility were repaid from funds received under the new agreement. The new
line is renewable annually at the discretion of the bank that expires on
March 31, 2001. There is no formula which limits the borrowings, and there are
no restrictive covenants, as in the prior credit facility. However, the Company
is required to eliminate borrowings for thirty consecutive days, of the
Company's choosing, each year and is required to maintain operating performance
which is acceptable to the bank. The Company completed the thirty-day period in
August
10
<PAGE>
2000. The credit facility bears interest at the prime rate in effect from
time-to-time plus three quarters of one percent. At September 30, 2000, $350,000
was outstanding in direct borrowings; there were no outstanding obligations
under letters of credit.
In July 2000, the Company moved and consolidated its operations from South
Bend, Indiana and Westbury, New York to Pompano Beach, Florida. The Company
believes the move will streamline its operations and reduce its cost structure
over time. In conjunction with the move, the company expensed approximately
$251,000 associated with establishing this new office, including severance
payments to employees who did not relocate. Funds were paid from existing cash
or cash generated by operations.
The Company did not incur any other long-term debt in Fiscal 2000. At
September 30, 2000, the Company had no long-term debt and all installment notes
and capital lease payments due were made on a timely basis.
DEFERRED INCOME TAXES
The Company's balance sheet at September 30, 2000 includes $1,344,000 of
deferred income taxes as an asset. The Company was profitable in Fiscal 2000 and
in Fiscal 1999. 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, 2000, the Company's stockholder's equity would have been reduced
by $1,344,000 to a stockholder's equity of $3,818,300 and the Company's working
capital at September 30, 2000 would have been reduced by $135,000 from
$3,155,100 to $3,020,100.
11
<PAGE>
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.
DEPENDENCE ON SIGNIFICANT CUSTOMERS.
The Company currently has certain customers for its carrying cases that
account for a significant percentage of the Company's business. In Fiscal 2000,
one of the Company's customers, together with its international affiliates,
accounted for approximately 50% of the Company's sales. In Fiscal 1999, the same
customer accounted for approximately 70% of the Company's sales. The loss of the
single largest customer (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) would
have a material adverse effect on the Company.
CONCENTRATION OF CREDIT RISK.
While the Company has not experienced significant losses by having extended
credit to its customers, at September 30, 2000, one customer and its
international affiliates accounted for approximately 40% of the Company's
accounts receivable. The same customer accounted for approximately 70% of the
Company's accounts receivable at September 30, 1999. The failure of this
customer to pay the Company such amounts when and as due would have a material
adverse effect on the Company.
DEPENDENCE ON FOREIGN MANUFACTURERS.
Substantially all of the Company's products are manufactured in China. The
Company does not have any written agreements with any of such contractors to
continue to supply the Company with finished product. The Company's operations
are subject to various political, economic, and other risks and uncertainties
inherent in the countries in which the Company operates. Among other risks, the
Company's operations are subject to the risks of restrictions on transfer of
funds; export duties, quotas, and embargoes; domestic and international customs
and tariffs; changing taxation policies; foreign exchange restrictions; and
political conditions and governmental regulations. The Company's reliance on
third parties involves significant risks, including reduced control over
delivery schedules, quality assurance, manufacturing yields and costs, the
potential lack of adequate capacity and potential misappropriations of the
Company's intellectual property.
POSSIBLE INABILITY TO REALIZE BENEFIT OF DEFERRED INCOME TAX ASSETS.
The Company's balance sheet at September 30, 2000 included deferred income
taxes of $1,344,000 as an asset. The Company was profitable in Fiscal 2000 and
in Fiscal 1999. However, to the extent that the Company's operations may not be
profitable in future periods, the Company will not be able to realize the
benefit of its deferred tax assets. Without such deferred tax assets, at
September 30, 2000, the Company's stockholder's equity at such dates of would
have been reduced by $1,344,000 from $5,162,300 to a stockholder's equity of
$3,818,300 and the Company's working capital at September 30, 2000 would have
been reduced by $135,000 from $3,155,100 to $3,020,100.
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. The
Company believes that it will generate sufficient revenues and income to use the
deferred tax asset.
12
<PAGE>
INTENSE COMPETITION AND EASE OF ENTRY.
There is intense competition in the sale of carrying cases. 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, Chairman and Chief Executive Officer and Michael Schiffman,
President. The Company has an employment agreement with Jerome E. Ball which
expired September 30, 2000. The Company is presently in negotiations with Mr.
Ball to renew his contract. Michael Schiffman's contract expires September 30,
2001. The business of the Company would be materially and adversely affected if
the Company lost the services these individuals. The Company does not have key
person life insurance as to these individuals.
ABSENCE OF CASH DIVIDENDS.
The Company has not paid any cash dividends since 1987. 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 of Directors. The
Company does not anticipate that cash dividends will be paid in the foreseeable
future.
CONTROL BY INSIDERS.
Members of the Board, including the Company's Chief Executive Officer,
Chairman-Emeritus, and President, and its Secretary, directly or indirectly,
beneficially own 2,438,507 shares of Common Stock, aggregating approximately 31%
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 stockholders 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 AND WARRANTS.
As of December 21, 2000, 2,297,125 shares of Common Stock, or an additional
38% of the outstanding Common Stock, are issuable upon the exercise or
conversion of such securities at prices ranging from $1.10 to $3.25 per share.
In November 1996, the Company's Board adopted, and in August 1997, the Company's
stockholders 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 (including vested and non-vested
options) to purchase up to 1,917,125 shares of Common Stock, included in the
figure above, have been granted under the Plan as of December 7, 2000. The terms
on which the Company may obtain additional financing during the respective terms
of these stock options and warrants 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 of Directors has the authority, without stockholder
approval, to issue preferred stock in one or
13
<PAGE>
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 used to
impede takeovers of the Company. Under certain circumstance, the issuance of the
preferred stock would make it more difficult for a third party to gain control
of the Company, discourage bids for the common stock at a premium, or otherwise
adversely affect the market price of the common stock. Such provisions may
discourage attempts to acquire the Company.
RISKS OF LOW-PRICED STOCKS.
The Securities and Exchange Commission (the "Commission") has adopted
regulations that define a "penny stock" as 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. 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. Additionally, 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
Securities Exchange Act of 1934 (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 21, 2000 was $.97. There can be no assurances that the per share price
of the Company's Common Stock will remain above $1.00. 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.
FUTURE SALES OF COMMON STOCK.
Of the 6,084,141 shares of Common Stock currently outstanding, approximately
26% of such shares are "restricted stock" as that term is defined under Rule 144
promulgated under the Securities Act of 1933, as amended (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.
14
<PAGE>
FOREIGN SOURCES OF SUPPLY.
Substantially all of the Company's products are manufactured in China. The
Company's operations are subject to various political, economic, and other risks
and uncertainties inherent in the countries in which the Company operates. Among
other risks, the Company's operations are subject to the risks of restrictions
on transfer of funds; export duties, quotas, and embargoes; domestic and
international customs and tariffs; changing taxation policies; foreign exchange
restrictions; and political conditions and governmental regulations.
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.
ITEM 7--FINANCIAL STATEMENTS
The financial statements and notes thereto can be found beginning with the
"Index to Financial Statements", following Part III of this annual report on
Form 10-KSB.
ITEM 8--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
15
<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 7, 2000
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- -------- -------------------------
<S> <C> <C>
Jerome E. Ball *............ 65 Chief Executive Officer and Chairman of the Board (1)
Theodore H. Schiffman....... 67 Chairman Emeritus
Michael Schiffman........... 35 President, Chief Operating Officer and Director (2)
Noah Fleschner *............ 64 Director
Samson Helfgott *........... 61 Director
Norman Ricken *............. 64 Director
Lawrence Mannes............. 64 Executive Vice President(3)
Douglas Sabra............... 41 Chief Financial Officer and Vice President(4)
Stephen Schiffman........... 31 Secretary and Vice President of Marketing and Sales for
Terrapin
</TABLE>
------------------------
* Member of the Audit Committee.
(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. In April 1999, Mr. Ball became Chairman.
(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) Lawrence Mannes was appointed Executive Vice President of the Company
effective August 1, 2000.
(4) Douglas Sabra was appointed Chief Financial Officer of the Company effective
September 15, 2000. Phillip B. Kart served as the Company's Chief Financial
Officer prior to Mr. Sabra's appointment.
Each of the directors holds office until the next annual meeting of
stockholders and until his successor has been duly elected and qualified.
JEROME E. BALL became Chief Executive Officer and Vice Chairman of the Board
effective October 1, 1998 and became Chairman of the Board in April 1999. Before
joining the Company, 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.
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 called for Mr. Schiffman to retain his position
as Chairman for six months after the date Mr. Ball joined the Company as Vice
Chairman. At that time, Mr. Ball assumed the position of Chairman and Mr.
Schiffman became Chairman Emeritus.
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<PAGE>
MICHAEL SCHIFFMAN has been employed by the Company in various capacities
since 1985 and became a director in April 1992. Mr. Schiffman was employed as a
salesman for the Company's advertising specialties products in 1985. He 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 assigned to
the Company's Hong Kong operation. Upon his return, he was appointed to
President and Chief Operating Officer of the Company. Michael Schiffman is the
son of Theodore H. Schiffman and the brother of Stephen Schiffman.
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. Mr. Helfgott served as Counsel to
General Electric Company Inc. 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.
NORMAN RICKEN was employed with Toys R Us Inc. for 18 years and served in
several key positions including Chief Financial Officer and President-Chief
Operating Officer before retiring in 1989 to pursue private investing and
consulting work. Mr. Ricken received his BBA from City College of New York and
is a Certified Public Accountant. Mr. Ricken became a director of the Company in
March 2000.
LAWRENCE E. MANNES became Executive Vice President of the Company in August
2000. Prior to joining the Company, Mr. Mannes spent 25 years as the Controller
of the Balson-Hercules Group, a textile manufacturing company that was sold to a
Canadian Stock Exchange listed company, Consoltex Group, Inc., Ltd., where he
served until 1998. Mr. Mannes was awarded a Bachelors Degree in accounting from
Bryant College and is the father-in-law of Douglas Sabra.
DOUGLAS W. SABRA became Vice President and Chief Financial Officer of the
Company in September 2000. Prior to joining the Company, Mr. Sabra was a
Controller for Tyco Submarine Systems (now Tycom Ltd.). Mr. Sabra retired from
the Coast Guard in 1998 after 22 years of service where he held variety of
financial management positions. Mr. Sabra received an MBA from University of
South Florida and a Bachelors of Accounting from Florida International
University. He is the son-in-law of Mr. Mannes.
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.
17
<PAGE>
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT.
To the Company's knowledge, the Company believes that during Fiscal 2000 all
section 16A filing requirements applicable to officers, directors and greater
than 10 percent beneficial owners were complied with except that a Form 3 will
be filed late for Mr. Sabra and Mr. Mannes.
ITEM 10--EXECUTIVE COMPENSATION
SUMMARY OF COMPENSATION IN FISCAL 2000, 1999, AND 1998
The following table sets forth certain summary information regarding all
cash and non-cash compensation paid by the Company during Fiscal 2000, Fiscal
1999 and Fiscal 1998 to each of its executive officers earning more than
$100,000. Non-employee directors have not been compensated for their attendance
at meetings.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
--------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------------------- --------------------------------- --------
OTHER SECURITIES LTIP
NAME AND ANNUAL RESTRICTED UNDERLYING PAYOUTS ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMP. $ STOCK AWARDS ($) OPTIONS $ COMP ($)
------------------ -------- -------- -------- -------- ---------------- -------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Jerome E. Ball........... 2000 $201,600 -- -- -- -- --
Chairman of the a 1999 $201,600 $140,000 250,000 shares
Board CEO
---- -------- -------- -------- -------- -------------- -------- --------
Theodore H. Schiffman.... b 2000 $200,000 $115,000
Chairman c 1999 $ 68,750 $150,000 $235,000
Emeritus 1998 $268,000
---- -------- -------- -------- -------- -------------- -------- --------
Michael Schiffman........ 2000 $230,000
President & Chief d 1999 $240,417 $220,000 400,000 shares
Operating Officer 1998 300,000 shares
---- -------- -------- -------- -------- -------------- -------- --------
Philip Kart.............. e 2000 $121,750 $ 49,500
Chief Financial 1999 $130,000 $ 35,000 75,000 shares
Officer 1998 $ 86,667
---- -------- -------- -------- -------- -------------- -------- --------
</TABLE>
--------------------------
(a) For Mr. Ball in Fiscal Year 1999: the Company paid a $20,000 bonus and
accrued an additional $140,000 bonus, based on performance estimates
available at year-end, and in accordance with his contract. The actual
amount of bonus earned for Fiscal Year 1999 was $140,000, of which $120,000
was paid in Fiscal Year 2000.
(b) For Mr. T. Schiffman in Fiscal Year 2000: "Other Annual Compensation" in the
amount of $200,000 reflects consulting payments made pursuant to his
contractual agreement. "All Other Compensation" reflects a $115,000
severance payment.
(c) For Mr. T. Schiffman in Fiscal Year 1999: Salary in the amount of $68,750
represents amounts paid prior to the effective date of his consulting
contract. "Other Annual Compensation" in the amount of $150,000 reflects
consulting payments made pursuant to his contractual agreement. All other
compensation reflects a $235,000 severance payment.
(d) For Mr. M. Schiffman in Fiscal Year 1999: Salary includes $10,417 as a
retroactive adjustment for a salary increase. The Company paid a bonus
$25,828 in that year and accrued an additional $194,172 bonus, based on
performance estimates available at year-end, and in accordance with his
contract. The amount accrued for Fiscal Year 1999 was paid in Fiscal Year
2000.
(e) For Mr. Kart in Fiscal 2000: "All Other Compensation" includes amounts
accrued related to his severance. For Fiscal Year 1999: The Company accrued
a $40,000 bonus, based on performance estimates available at year-end. The
actual amount of bonus earned for Fiscal Year 1999 was $35,000 and was paid
in Fiscal Year 2000.
18
<PAGE>
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 receives an annual consulting fee of $200,000 for a period commencing
January 1, 1999 and, ending December 10, 2003. In addition, Mr. Schiffman will
receive severance payments totaling $350,000, of which $200,000 was paid on
January 1, 1999 and $150,000 on January 1, 2000, $35,000 of the January 1, 2000
payment was used for the partial payment of a note due the Company from Mr.
Schiffman on September 30, 1999, and a reduction in the exercise price of his
450,000 options to $1.10 per share. Mr. Schiffman stepped down as Chairman six
months after the date Mr. Ball joined the Company and thereafter became 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 predeceases 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, a monthly death benefit of
$10,000 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 the confidentiality of trade secrets and work product of the
Company.
Effective October 1, 1998, the Company entered into an employment agreement
with Jerome E. Ball (the "JEB Agreement") pursuant to which Mr. Ball was
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 percent of
the pre-tax operating profit in excess of $675,000. The bonus 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. These options became exercisable
at the end of his first year of employment with 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. The
Company is currently in negotiations with Mr. Ball for the renewal of his
contract.
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 three percent of all sales by
the Company over $13 million per year, payable on a pro rata 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, 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. During
the fiscal year-ended September 30, 1999, Mr. Schiffman earned 400,000 options
and was provided $25,828 as a prepayment towards his bonus and the Company
accrued an additional $194,172 bonus pursuant to the terms of his agreement.
During the fiscal year ended September 30, 2000, and based on his employment
agreement, Mr. Schiffman earned a bonus of approximately $42,300 which he
elected to forego without recourse.
19
<PAGE>
OPTION GRANTS
In December 1996, the Board of Directors adopted the 1996 Stock Incentive
Plan, pursuant to which up to four million 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. Options generally expire ten years
after the date of grant and generally vest as follows; 37% after one year, 67%
after two years and fully vest after three years. During Fiscal year 2000 the
Company granted 15,000 options each to Mr. Sabra and Mr. Mannes, at the then
current market price of $1.50.
No options were granted to any of the individuals named in the Summary
Compensation Table during Fiscal 2000.
STOCK OPTIONS HELD AT END OF FISCAL 2000
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, 2000. No options to purchase Common Stock
were exercised during Fiscal 2000 and no stock appreciation rights were
outstanding during Fiscal 2000. The closing price of the Company's stock at
September 30, 2000 was $1.47.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
SECURITIES UNDERLYING OPTION/SARS
OPTIONS AT FY-END AT FY END-
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
---- --------------- ---------- --------------------- --------------------
<S> <C> <C> <C> <C>
Jerome E. Ball.......................... -- -- 250,000/0 --
Theodore H. Schiffman................... -- -- 450,000/0 $166,500/0
Michael Schiffman....................... -- -- 850,000/0 --
Phillip B. Kart......................... -- -- 56,250/18,750 --
</TABLE>
ITEM 11--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth below is information, as of November 25, 2000, 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
20
<PAGE>
(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
IDENTITY OF BENEFICIAL OWNER OF COMMON STOCK NOTES PERCENT OF CLASS
---------------------------- ---------------- -------- ----------------
<S> <C> <C> <C>
Jerome E. Ball
1801 Green Road Suite E
Pompano Beach, FL. 33064.............................. 446,500 (a) 5.7%
Theodore H. Schiffman
1801 Green Road Suite E (b)
Pompano Beach, FL. 33064.............................. 671,100 (d) 8.5%
Michael Schiffman
1801 Green Road Suite E (c)
Pompano Beach, FL. 33064.............................. 1,200,327 (d) 15.2%
Philip B. Kart
1801 Green Road Suite E
Pompano Beach, FL. 33064.............................. 96,250 (e) 1.2%
Noah Fleschner
1801 Green Road Suite E
Pompano Beach, FL. 33064.............................. 330 *
Samson Helfgott
1801 Green Road Suite E
Pompano Beach, FL. 33064.............................. -- --
Norman Ricken
1801 Green Road Suite E
Pompano Beach, FL. 33064.............................. 20,000 *
Robert S. Ellin and related investors
750 Lexington Avenue
New York, NY 10022.................................... 694,517 (f) 8.8%
All directors and executive officers as
a group (7 persons)................................... 2,434,507 31.0%
</TABLE>
------------------------
* Less than 1 percent
(a) Includes 250,000 shares of Common Stock issuable upon the exercise of vested
stock options.
(b) Includes 40,700 shares owned by Mr. Theodore Schiffman's wife, as to all of
which shares Mr. Schiffman disclaims beneficial ownership. Includes 150,000
shares subject to options granted by the Company on October 12, 1994 at an
exercise price of $1.50 and 300,000 shares subject to options granted by the
Company on November 15, 1995 at an exercise price of $2.00. The exercise
prices for all such options were reduced to $1.10 in connection with his
resignation and the THS Consulting Agreement.
(c) Includes 150,000 shares subject to options granted by the Company on October
12, 1994 at an exercise price of $1.50 per share, 300,000 shares subject to
options granted by the Company on November 15, 1996 at an exercise price of
$2.00 per share, 200,000 shares subject to options granted by the Company on
September 2, 1999 at $1.88 per share and 200,000 shares subject to options
granted by the Company on September 17, 1999 at $3.25 per share.
(d) Theodore H. Schiffman, the Chairman Emeritus 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.
21
<PAGE>
(e) Includes 56,250 fully vested options granted by the Company on August 16,
2000 at an exercise price of $2.00.
(f) Includes (i) 276,350 shares of Common Stock owned by Atlantis Equities, Inc.
("Atlantis"), a corporation for which Mr. Ellin is the sole officer and
director, (ii) 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, (iii) 2,500 shares of Common Stock owned by
Mr. Ellin, (iv) 268,167 shares of Common Stock owned by the Robert Ellin
Profit Sharing Plan (the "Plan") of which Mr. Ellin is the beneficiary, and
(v) 110,000 shares of Common Stock held by Nancy J. Ellin, the wife of Mr.
Ellin.
* Less than 1.0%.
ITEM 12--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 24, 2000, the Company provided a loan to Michael Schiffman in the
amount of $370,000, at the prime rate in effect from time-to-time plus three
quarters of one percent. The purpose of the loan was to finance construction of
a home by him in connection with the Company's relocation to Florida. The
Company has been assigned the right to file a mortgage and lien on the property
in the event the note is not repaid, as well as a pledge of 350,000 common
shares of the Company's stock owned by him, as additional security. In Fiscal
2000 he made payments on the note totaling approximately $86,000. During
December 2000, the Board of Directors resolved that the repayment would be
required 45 days after completion of the home (expected to be May 31, 2001) and
in any event no later than June 15, 2001. As of September 30, 2000 the balance
of the note with accrued interest was $301,113. On October 7, 2000, subsequent
to the balance sheet, Mr. Schiffman made an additional payment in the amount of
$83,068 reducing the balance of the note to approximately $220,000
The Company has paid insurance premiums and interest totaling $62,060 on
behalf of Theodore Schiffman. These advances were made pending execution of an
agreement between The Theodore H. Schiffman Insurance Trust (the "Schiffman
Insurance Trust") and the Company. Under the terms of the proposed agreement,
the Company would be repaid upon Mr. Schiffman's death from the proceeds of an
insurance policy owned by the Schiffman Insurance Trust. To date, the agreement
between the Company and the Trust has not been executed. The Company is
currently reviewing the terms of the agreement.
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, 2000, Theodore Schiffman 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 balance
due, in, principal amount of $93,703, due at September 30, 1998. The THS
Consulting Agreement requires repayment of the loan in full from his consulting
fee over the term of such agreement. As of September 30, 2000, $55,470 remains
outstanding after the second of five annual payments. Michael Schiffman executed
a similar promissory note in the principal amount of $50,000, 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. The balance of
which was paid in full during Fiscal 2000.
Theodore H. Schiffman's son, Stephen Schiffman, is employed by the Company
at an annual salary of $50,000. Stephen Schiffman is the Company's Secretary and
an administrator of the Company's Terrapin-TM- line of notebook computer
carrying cases.
22
<PAGE>
Jerome E. Ball, 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 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. The Private Placement
Warrants expired on March 15, 1999. Mr. Ball agreed not to sell or otherwise
dispose of securities received upon conversion of the Notes held by him without
the Company's consent for a period of one year.
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 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. The Private Placement Warrants expired on March 15, 1999.
Mr. Schiffman agreed not to sell or otherwise dispose of securities received
upon conversion of the Notes held by him without the Company's consent for a
period of one year.
On December 2, 1998, Philip B. Kart, the former 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. The Private Placement Warrants expired on
March 15, 1999. Mr. Kart agreed not to sell or otherwise dispose of securities
received upon conversion of the Notes held by him without the Company's consent
for a period of one year.
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.
The Company pays accounting and consulting fees to Miller, Ellin & Company,
LLP a Certified Public Accounting firm. Mr. Robert Ellin's father is a partner
in that firm.
On December 2, 1998, (i) Nancy J. Ellin, the wife of Mr. Ellin, purchased
Notes for $55,000 from the Company which were 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 Notes for $45,000
from the Company which were converted into an aggregate of 90,000 shares of
Common Stock and Private Placement Warrants to purchase 135,000 shares of Common
Stock. The Private Placements Warrants expired on March 15, 1999. Mrs. Ellin,
and the Robert Ellin Profit Sharing Plan agreed 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 for a
period of one year.
Mr. Ellin received a fee of $40,000 in connection with his recruitment of
Jerome E. Ball as the Company's Chief Executive Officer. In December 1999, the
Company made a payment of $35,000 to Atlantis Equities, a firm owned by Mr.
Ellin, as fees for a consulting arrangement.
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. The note was paid in full fiscal 1999.
23
<PAGE>
ITEM 13--EXHIBITS AND REPORTS ON FORM 8-K
2. PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION
<TABLE>
<C> <S>
2.1 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"))
2.2 Settlement Agreement dated December 27, 1995, between the
Company and Northeast Looseleaf, Inc. et al. (Incorporated
herein by reference to Exhibi 2(a)(1) to the Company's
Form 10-KSB for the fiscal year ended September 30, 1995)
2.3 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)
</TABLE>
3. ARTICLES OF INCORPORATION AND BY-LAWS
<TABLE>
<C> <S>
3.1 Certificate of Incorporation of the Company as amended
(incorporated by reference to Exhibit 2(a) to the
Form 10-SB)
3.2 By-Laws (incorporated by reference to Exhibit 2(b) to the
Form 10-SB)
3.3 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")
3.4 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)
</TABLE>
4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS
<TABLE>
<C> <S>
4.1 Form of Subscription Agreement executed in connection with
the 1997 Private Placement November--December, 1994
(transfer restriction) (incorporated by reference to
Exhibit 3(a) to the Form 10-SB)
4.2 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)
4.3 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)
4.4 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)
4.5 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)
</TABLE>
24
<PAGE>
<TABLE>
<C> <S>
4.6 CWAI Consultants Corp. Warrant dated December 11, 1995,
superseding the Restated and Amended CWAI Consultants Corp
Warrant filed as Exhibit 4(c)(2) (incorporated by reference
to Exhibit 4(c)(3) to the Company's Annual Report on
Form 10-KSB for the fiscal year ended September 30, 1995.)
4.7 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)
4.8 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)
4.9 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)
4.10 Business Loan and Security Agreement dated April 13, 1998
between Forward Industries, Inc., Koszegi Industries, Inc.
and Summit Bank (without exhibits) (incorporated by refer-
ence to the Company's Current Report on Form 8-K filed with
the Commission on May 12, 1998)
</TABLE>
9. VOTING TRUST AGREEMENT--Not applicable
10. MATERIAL CONTRACTS
<TABLE>
<C> <S>
10.1 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)
10.2 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)
10.3 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)
10.4 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)
10.5 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)
10.6 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)
</TABLE>
25
<PAGE>
<TABLE>
<C> <S>
10.7 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)
10.8 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*
10.9 Employment Agreement effective as of October 1, 1998 between
the Company and Jerome E. Ball. (incorporated by reference
to the Company's 10-KSB Exhibit 4(t) for the period ended
September 30, 1999)
10.10 Consulting Agreement effective as of October 1, 1998 between
the Company and Theodore H. Schiffman. (incorporated by
reference to the Company's 10-KSB Exhibit 4(v) for the
period ended ended September 30, 1999)
10.11 Employment Agreement effective as of October 1, 1998,
between the Company and Michael Schiffman. incorporated by
reference to the Company's 10-KSB Exhibit 4(W) for the
period ended ended September 30, 1999.
</TABLE>
16. LETTER ON CHANGE IN CERTIFYING ACCOUNTANT--
<TABLE>
<C> <S>
16.1 Incorporated by reference to Exhibit 16.1 to the Company's
Current Report on Form 8-K dated June 9, 1997
</TABLE>
21. SUBSIDIARIES OF THE SMALL BUSINESS ISSUER
<TABLE>
<C> <S>
21.1 Incorporated by reference to Exhibit 21 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1995)
</TABLE>
23. CONSENT OF EXPERTS AND COUNSEL--
<TABLE>
<C> <S>
23.1 Consent of Patrusky, Mintz & Semel *
</TABLE>
27. FINANCIAL DATA SCHEDULE
<TABLE>
<C> <S>
27.1 Submitted herewith and can be found following the audited
financial statements.
</TABLE>
------------------------
* Filed herewith
26
<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.
<TABLE>
<S> <C> <C>
Dated: December 21, 2000 FORWARD INDUSTRIES, INC.
By: /s/ JEROME E. BALL
-----------------------------------------
Jerome E. Ball
CHIEF EXECUTIVE OFFICER, AND
CHAIRMAN OF THE BOARD
</TABLE>
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:
<TABLE>
<CAPTION>
DATE NAME
---- ----
<C> <S>
December 21, 2000 /s/ JEROME E. BALL
---------------------------------------------
Jerome E. Ball
Chief Executive Officer, and
Chairman of the Board
(Principal Executive Officer)
December 21, 2000 /s/ DOUGLAS W. SABRA
---------------------------------------------
Douglas W. Sabra
Chief Financial Officer and Vice President
(Principal Financial Officer and
Principal Accounting Officer)
December 21, 2000 /s/ THEODORE H. SCHIFFMAN
---------------------------------------------
Theodore H. Schiffman
Director
December 21, 2000 /s/ MICHAEL SCHIFFMAN
---------------------------------------------
Michael Schiffman
President and Director
December 21, 2000 /s/ NOAH FLESCHNER
---------------------------------------------
Noah Fleschner
Director
December 21, 2000 /s/ SAMSON HELFGOTT
---------------------------------------------
Samson Helfgott
Director
December 21, 2000 /s/ NORMAN RICKEN
---------------------------------------------
Norman Ricken
Director
</TABLE>
27
<PAGE>
ITEM 7--FINANCIAL STATEMENTS
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
REPORT ON
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED SEPTEMBER 30, 2000
CONTENTS
<TABLE>
<CAPTION>
PAGE
-------------------
<S> <C>
INDEPENDENT AUDITORS' REPORT................................ F-2
CONSOLIDATED BALANCE SHEET.................................. F-3
CONSOLIDATED STATEMENTS OF INCOME........................... F-4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME............. F-5
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY.................................................... F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS....................... F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-8 - F-23
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS.............. F-24
EXHIBIT 11--COMPUTATION OF INCOME PER COMMON SHARE.......... F-25 - F-26
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS'
FORWARD INDUSTRIES, INC.
POMPANO BEACH, FLORIDA
We have audited the accompanying consolidated balance sheet of Forward
Industries, Inc. and Subsidiaries as of September 30, 2000, and the related
consolidated statements of income, comprehensive income, changes in
stockholders' equity, and cash flows for the years ended September 30, 2000 and
1999. 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 auditing standards generally
accepted in the United States. 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 consolidated financial position of
Forward Industries, Inc. and Subsidiaries as of September 30, 2000, and the
consolidated results of their operations and their cash flows for the years
ended September 30, 2000 and 1999 in conformity with accounting principles
generally accepted in the United States.
We have audited Schedule II and Exhibit 11 of the Company for the year ended
September 30, 2000 and 1999 included in the 2000 annual report of the Company on
Form 10-KSB. In our opinion, the schedule and exhibit present fairly the
information required to be set forth therein.
As discussed in Note 19, the accompanying financial statements for the year
ended September 30, 1999 have been restated.
<TABLE>
<S> <C>
/s/ Patrusky, Mintz & Semel
-------------------------------------------
PATRUSKY, MINTZ & SEMEL
CERTIFIED PUBLIC ACCOUNTANTS
</TABLE>
NEW YORK, NEW YORK
November 17, 2000 except for
Notes 6 and 19, as to which the
date is December 8, 2000.
F-2
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2000
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 840,532
Accounts receivable, less allowance for doubtful accounts
of $67,765.............................................. 2,062,415
Inventories (Note 2)...................................... 857,082
Notes receivable--current portion (Note 3)................ 143,235
Notes and loans receivable--officers--current portion
(Note 6)................................................ 319,603
Prepaid expenses and other current assets (Note 7)........ 459,697
Deferred income taxes (Note 11)........................... 135,000
-----------
Total current assets.................................... 4,817,564
PROPERTY PLANT AND EQUIPMENT--net--(Note 4)................. 572,177
-----------
ASSETS HELD FOR SALE--net--(Note 5)......................... 179,475
-----------
OTHER ASSETS:
Notes and loans receivable--officers--net of current
portion (Note 6)........................................ 99,040
Deferred income taxes (Note 11)........................... 1,209,000
Other Assets.............................................. 60,071
-----------
Total other assets...................................... 1,368,111
-----------
TOTAL ASSETS................................................ $ 6,937,327
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 784,950
Notes payable under credit line (Note 9).................. 350,000
Current portion of capital lease obligations (Note 8)..... 24,360
Accrued payable and other current liabilities (Note 10)... 503,170
-----------
Total current liabilities............................... 1,662,480
CAPITAL LEASE OBLIGATIONS--net of current portion (Note
8)........................................................ 112,595
-----------
TOTAL LIABILITIES........................................... 1,775,075
-----------
STOCKHOLDERS' EQUITY:
Preferred stock, 4,000,000 authorized shares, par value
$.01; none issued
Common stock, 40,000,000 authorized shares, par value
$.01; 6,286,531 shares
issued (including 202,390 held in treasury) (Note 14)... 62,865
Paid-in capital........................................... 7,679,768
Accumulated deficit....................................... (2,233,479)
Foreign currency adjustment............................... 8,799
-----------
5,517,953
Less: Cost of shares in treasury.......................... (355,701)
-----------
Total stockholders' equity.............................. 5,162,252
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 6,937,327
===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
NET SALES................................................... $14,410,035 $20,553,192
COST OF GOODS SOLD.......................................... 9,936,339 14,307,809
----------- -----------
GROSS PROFIT................................................ 4,473,696 6,245,383
----------- -----------
OPERATING EXPENSES:
Selling................................................... 1,865,717 1,791,043
General and administrative................................ 2,225,143 2,800,011
Relocation expense........................................ 251,125 --
----------- -----------
4,341,985 4,591,054
----------- -----------
INCOME FROM OPERATIONS...................................... 131,711 1,654,329
----------- -----------
OTHER INCOME (DEDUCTIONS):
Interest expense............................................ (104,323) (337,646)
Interest expense--related parties......................... -- (1,709)
Interest income........................................... 96,777 79,553
Other income (deductions) net............................. 23,054 (152,660)
----------- -----------
15,508 (412,462)
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES.................... 147,219 1,241,865
PROVISION FOR INCOME TAXES (Note 11)........................ 55,129 395,000
----------- -----------
NET INCOME.................................................. $ 92,090 $ 846,865
=========== ===========
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE (Note 17):
Basic:
Net Income.............................................. $ .02 $ .14
=========== ===========
Diluted:
Net Income.............................................. $ .01 $ .14
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING (Note 17):
Basic................................................... 6,088,516 5,751,266
=========== ===========
Diluted................................................. 6,761,884 5,821,554
=========== ===========
DIVIDENDS................................................... NONE NONE
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Comprehensive income consists of net income and other gains and losses
affecting stockholders' equity that, under generally accepted accounting
principles are excluded from net income. For the Company, such items consist of
foreign currency translation gains and losses. The changes in the components of
other comprehensive income are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------
2000 1999
---------- ----------
<S> <C> <C>
NET INCOME.................................................. $ 92,090 $846,865
COMPREHENSIVE INCOME ADJUSTMENT--Foreign translation:....... 9,388 17,128
-------- --------
COMPREHENSIVE INCOME........................................ $101,478 $863,993
======== ========
</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>
YEAR ENDED SEPTEMBER 30, 1999
-------------------------------------------------------------------------------------------------
COMMON STOCK RETAINED TREASURY STOCK
--------------------------------- EARNINGS FOREIGN ---------------------
NUMBER OF PAID-IN (ACCUM. CURRENCY NUMBER OF
TOTAL SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENT SHARES AMOUNT
---------- --------- -------- ---------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE
October 1, 1998 as
previously reported....... $3,461,157 4,963,031 $49,630 $6,551,703 $(2,884,346) $(17,717) (164,890) $(238,113)
---------- --------- ------- ---------- ----------- -------- -------- ---------
Adjustment for beneficial
conversion (Note 19)........ 45,320 -- -- 333,408 (288,088) -- -- --
---------- --------- ------- ---------- ----------- -------- -------- ---------
October 1, 1998, as
restated.................... 3,506,477 4,963,031 49,630 6,885,111 (3,172,434) (17,717) (164,890) (238,113)
Common stock issued in
connection with conversion
of notes payable............ 554,000 1,108,000 11,080 542,920 -- -- -- --
Offering costs of conversion
of debt to equity........... (11,950) -- -- (11,950) -- -- -- --
Beneficial charge related to
note conversion (Note 14)... 220,592 -- -- 220,592 -- -- -- --
Exercise of Class B
Warrants.................... 107,750 215,500 2,155 105,595 -- -- -- --
Shares repurchased in
open-market transactions.... (63,056) -- -- -- -- -- (20,000) (63,056)
Reversal of expense for
Warrants issued for services
which lapsed (Note 14)...... (62,500) -- -- (62,500) -- -- -- --
Foreign currency translation
adjustment.................. 17,128 -- -- -- -- 17,128 -- --
Net Income.................... 846,865 -- -- -- 846,865 -- -- --
---------- --------- ------- ---------- ----------- -------- -------- ---------
BALANCE
September 30, 1999.......... $5,115,306 6,286,531 $62,865 $7,679,768 $(2,325,569) $ (589) (184,890) $(301,169)
========== ========= ======= ========== =========== ======== ======== =========
YEAR ENDED SEPTEMBER 30, 2000
-------------------------------------------------------------------------------------------------
BALANCE
September 30, 1999.......... $5,115,306 6,286,531 $62,865 $7,679,768 $(2,325,569) $ (589) (184,890) $(301,169)
========== ========= ======= ========== =========== ======== ======== =========
Shares repurchased in
open-market transactions.... (54,532) -- -- -- -- -- (17,500) (54,532)
Foreign currency translation
adjustment.................. 9,388 -- -- -- -- 9,388 -- --
Net income.................... 92,090 -- -- -- 92,090 -- -- --
---------- --------- ------- ---------- ----------- -------- -------- ---------
BALANCE
September 30, 2000.......... $5,162,252 6,286,531 $62,865 $7,679,768 $(2,223,479) $ 8,799 (202,390) $(355,701)
========== ========= ======= ========== =========== ======== ======== =========
</TABLE>
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,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income................................................ $ 92,090 $ 846,865
Adjustments to reconcile net income to net cash provided
by (used in) continuing operations:
Beneficial Conversion interest charge................... -- 220,592
Amortization of note discount........................... 45,320
Loss (Gain) on sale of property and equipment........... 17,161 (68,299)
Amortization of deferred debt costs..................... 31,876
Depreciation and amortization........................... 122,681 132,566
Deferred taxes............................................ 70,027 335,000
Non-cash compensation (reversal).......................... -- (62,500)
Changes in assets and liabilities:
Accounts receivable..................................... 2,675,848 (1,831,420)
Inventories............................................. 134,982 91,598
Prepaid expenses and other current assets............... (5,944) 73,903
Other assets............................................ 3,996 (14,352)
Accounts payable........................................ (1,516,607) 1,085,985
Accrued severance to officer............................ (115,000) (235,000)
Accrued expenses and other current liabilities.......... (795,296) 79,892
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 715,814 700,150
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.............. 2,415 51,130
Proceeds from notes and loans receivable.................. 210,907 342,446
Principal payments on capital lease obligations........... (1,958) --
(Advances to) proceeds from officer's loans--net.......... (334,682) 32,312
Purchases of property, plant and equipment................ (262,569) (375,335)
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES......... (385,887) 50,553
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from short term borrowings....................... 350,000 --
Payments of short term borrowings......................... (995,852) (248,251)
Payments of note payable--related party................... -- (42,670)
Proceeds from issuance of stock........................... -- 107,750
Deferred offering costs................................... -- (11,950)
Purchase of treasury shares............................... (54,532) (63,056)
Deferred debt cost........................................ (9,161) (2,812)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES....................... (709,545) (260,989)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES............................. 9,388 17,128
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (370,230) 506,842
CASH AND CASH EQUIVALENTS--beginning........................ 1,210,762 703,920
----------- -----------
CASH AND CASH EQUIVALENTS--ending........................... $ 840,532 $ 1,210,762
=========== ===========
SUPPLEMENTAL DISCLOURES OF CASH FLOW INFORMATION:
Cash paid in the year for:
Interest................................................ $ 72,447 $ 69,913
Income Taxes............................................ $ 49,823 $ 6,258
SCHEDULE OF NON-CASH ACTIVITIES:
Equipment acquired under capital lease obligations........ $ 138,913 --
Property reclassified as assets held for sale............. 179,475 --
Warrants lapsed for services rendered..................... -- $ (62,500)
Issuance of common stock upon conversion of long term
debt.................................................... -- 554,000
Sale of property and equipment held for sale.............. -- 171,369
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
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 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 electronic devices such as cellular phones, medical devices and
computers. The Company markets products either as a direct seller or as an
original-equipment-manufacturer to customers in the United States, Europe, Asia
and Australia. For the years ended September 30, 2000 and 1999, respectively,
approximately 54% and 72% 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
Preparing the Company's financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect 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 those estimates.
CASH EQUIVALENTS
Cash equivalents consist of cash on deposit and 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.
Credit terms to customers are generally net thirty (30) days. The Company has
not historically experienced significant losses in extending credit to
customers.
Three customers accounted for approximately 70%, and one customer accounted
for approximately 80%, of the Company's accounts receivable at September 30,
2000 and 1999, 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. One customer accounted for approximately
48%, and 60% of net sales in Fiscal 2000 and Fiscal 1999, respectively.
F-8
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
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 approximately 30% and 36% of its inventory from
this supplier in Fiscal 2000 and Fiscal 1999, 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 and equipment are recorded at cost. Expenditures for major
additions and improvements are capitalized, and minor replacements, maintenance,
and repairs are charged to expense as incurred. When property and equipment are
retired or otherwise disposed of, the cost and accumulated depreciation are
removed from the accounts and any resulting gain or loss is included in the
results of operations for the respective period. Depreciation is provided over
the estimated useful lives of the related assets using the straight-line method
for financial statement purposes. The Company uses other depreciation methods
(generally accelerated) for tax purposes where appropriate. The estimated useful
lives for significant property and equipment categories are as follows:
<TABLE>
<S> <C>
Transportation Equipment & Vehicles......................... 3 to 10 years
Furniture Fixtures and equipment............................ 3 to 10 years
Leasehold improvements...................................... *
Buildings and improvements.................................. 10 to
20 years
</TABLE>
*Amortization of leasehold improvements is computed using the straight-line
method over the shorter of the remaining lease term or the estimated useful
lives of the improvements.
Assets held under capital leases are recorded at the lower of the net
present value of the minimum lease payments or the fair value of the leased
asset at the inception of the lease. Amortization expense is computed using the
straight-line method over the shorter of the estimated useful lives of the
assets or the period of the related lease.
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 14). Such
costs were charged against paid-in capital when the respective sales of the
units were closed.
F-9
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred debt costs were incurred in connection with obtaining debt
financing, either in the Company's 1997 Private Placement (see Note 14) or for
the Company's bank credit facility (see Note 9). The costs are amortized over
the term of the debt issued. Amortization amounted to $31,876 and $62,204 for
the years ended September 30, 2000 and 1999, respectively.
ADVERTISING COSTS
Advertising costs are charged to operations when incurred. Advertising costs
amounted to $45,863 and $49,680 for the years ended September 30, 2000 and 1999,
respectively.
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.
NET INCOME PER SHARE
The Company adopted SFAS No. 128, "Earnings Per Share," which established
new standards for computing and presenting net earnings per share. This
statement also requires the restatement of all prior period earnings per share
data presented. Basic net earnings per common share is computed by dividing net
earnings applicable to common stockholders by the weighted-average number of
common shares outstanding during the period. Diluted net earnings per common
share is determined using the weighted-average number of common shares
outstanding during the period, adjusted for the dilutive effect of common stock
equivalents, consisting of shares that might be issued upon exercise of common
stock options, warrants and other financial instruments convertible into the
Company's common stock. In periods where losses are reported, the
weighted-average number of common shares outstanding excludes common stock
equivalents, because their inclusion would be anti-dilutive.
F-10
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" in fiscal
1999. 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--INVENTORIES
Inventories at September 30, 2000 are comprised of the following:
<TABLE>
<S> <C>
Finished goods.............................................. $844,710
Raw materials and supplies.................................. 12,372
--------
$857,082
========
</TABLE>
NOTE 3--NOTES RECEIVABLE
Notes receivable in the amount of $143,235 consist of the following at
September 30, 2000:
Two non-interest bearing promissory notes received as part of the sale of
the Company's Advertising Specialties division on September 30, 1997; originally
payable in equal monthly installments of $23,611 commencing in October 1997, and
$2,879 commencing January 1998, through September 2000. In July 1999, remaining
amounts were combined into monthly installments of $14,733 over 24 months.
Interest on the notes has been imputed at a rate of 12 1/2% per annum. The notes
are secured by the assets sold by the Company, and a personal guarantee of
$200,000.
In August 2000, the Company initiated legal proceedings to protect its
rights under the terms of the notes. In October, subsequent to the balance sheet
date, the Company was awarded a summary judgment for the entire amount of the
note plus associated legal fees. The Company believes the entire amount will be
collectible; therefore no provision for impairment has been recorded.
Interest income on the notes is recognized when cash is received and
amounted to $24,321 and $39,261 for the years ended September 30, 2000 and 1999,
respectively.
F-11
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
NOTE 4--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at September 30, 2000 consists of the
following:
<TABLE>
<CAPTION>
ACCUMULATED BOOK
CATEGORY COST DEPRECIATION VALUE
-------- -------- ------------ --------
<S> <C> <C> <C>
Furniture, fixtures and equipment*........... $561,909 $(111,442) $450,467
Leasehold improvements....................... 131,234 (64,646) 66,588
Transportation equipment..................... 91,549 (36,427) 55,122
-------- --------- --------
Totals:.................................... $784,692 $(212,515) $572,177
======== ========= ========
</TABLE>
*Furniture, fixtures and equipment include assets acquired under capital
leases of $138,319. Related amortization included in accumulated depreciation is
$1,653.
**Amortization of leasehold improvements is computed using the straight-line
method over the shorter of the remaining lease term or the estimated useful
lives of the improvements.
Depreciation expense amounted to $122,681 and $70,362 for the years ended
September 30, 2000 and 1999, respectively.
NOTE 5--ASSETS HELD FOR SALE
In connection with the Company's consolidation of its offices from New York
and South Bend, Indiana, to Pompano Beach, Florida, land and a building owned by
the Company in South Bend, became available for sale. Current market comparisons
indicate that the fair market value is equal to, or greater than, the net book
value of the assets; accordingly, the assets are presented in the accompanying
balance sheet at their net book value as follows:
<TABLE>
<CAPTION>
ACCUMULATED BOOK
CATEGORY COST DEPRECIATION VALUE
-------- -------- ------------ --------
<S> <C> <C> <C>
Land......................................... $ 25,000 $ -- $ 25,000
Building..................................... 108,721 (53,455) 55,266
Building Improvements........................ 106,820 (7,611) 99,209
-------- -------- --------
Totals:.................................... $240,541 $(61,066) $179,475
======== ======== ========
</TABLE>
F-12
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
NOTE 6--NOTES AND LOANS RECEIVABLE--OFFICERS
At September 30, 2000 notes and loans receivable--officers consist of the
following amounts, which had been provided to officers for personal needs and
not for the acquisition of stock or options:
<TABLE>
<S> <C>
Note receivable issued in the amount of $235,535 payable at
$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.............................................. $ 55,470
Non-interest bearing advances pending completion of
insurance sharing agreement............................... 62,060
Note receivable issued on April 24, 2000 in the amount of
$370,000 to cover costs of relocation to Florida at prime
plus three quarter percent................................ 301,113
--------
Totals:................................................. $418,643
Less: Current maturities.................................... 319,603
--------
$ 99,040
========
</TABLE>
Maturities of notes and loans receivable--officers are as follows:
<TABLE>
<S> <C>
FISCAL YEAR ENDING SEPTEMBER 30,
------------------------------------------------------------
2001........................................................ $319,603
2002........................................................ 18,490
2003........................................................ 18,490
Other*...................................................... 62,060
--------
Totals.................................................... $418,643
========
</TABLE>
*Represents amounts that would be payable to the Company under the pending
insurance agreement upon the death of the former executive.
On April 24, 2000, the Company provided a loan to Michael Schiffman in the
amount of $370,000, at the prime rate in effect from time-to-time plus three
quarters of one percent. The purpose of the loan was to finance construction of
a home by him in connection with the Company's relocation to Florida. The
Company has been assigned the right to file a mortgage and lien on the property
in the event the note is not repaid, as well as a pledge of 350,000 common
shares of the Company's stock owned by him, as additional security. In Fiscal
2000 he made payments on the note totaling approximately $86,000. During
December 2000, the Board of Directors resolved that the repayment would be
required 45 days after completion of the home (expected to be May 31, 2001) and
in any event no later than June 15, 2001. As of September 30, 2000 the balance
of the note with accrued interest was $301,113. On October 7, 2000, subsequent
to the balance sheet, Mr. Schiffman made an additional payment in the amount of
$83,068 reducing the balance of the note to approximately $220,000.
The Company has paid insurance premiums and interest totaling $62,060 on
behalf of its former chairman and chief executive officer. These advances were
made pending execution of an agreement between "The Theodore H. Schiffman
Insurance Trust" and the Company. Under the terms of the proposed agreement, the
Company would be repaid upon the death of the former executive from the proceeds
of an insurance policy owned by the Trust. To date, the agreement between the
Company and
F-13
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
NOTE 6--NOTES AND LOANS RECEIVABLE--OFFICERS (CONTINUED)
the Trust has not been executed. The Company is currently reviewing the terms of
the agreement. Therefore, the amounts paid are reflected as a related party
advance to an officer until the agreement is finalized.
In addition to the notes outstanding at September 30, 2000, the following
officer loan transactions occurred during the fiscal year:
A ninety-day (90), unsecured, promissory note in the amount of $40,000,
which had been provided to the Company's Chief Executive Officer for personal
needs, was repaid on June 29, 2000, plus interest of $2,000. The note was
originally issued on December 16, 1999 with interest at the prime rate in effect
from time-to-time plus three quarters of one percent.
A Note receivable from the Company's President in the amount of $10,000 per
year, was repaid in full plus interest at 7%.
Interest income on Officer notes and loans amounted to $23,491 and $6,597
for the years ended September 30, 2000 and 1999, respectively.
NOTE 7--PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets at September 30, 2000 consist of
the following:
<TABLE>
<S> <C>
Non-trade receivables....................................... $194,789
Prepaid insurance........................................... 39,979
Prepaid rents............................................... 23,095
Sundry others............................................... 201,834
--------
$459,697
========
</TABLE>
NOTE 8--CAPITAL LEASES
The Company leases certain equipment under agreements that are classified as
capital leases. The cost of equipment under capital leases is included in the
Balance Sheets as property, plant, and equipment and was $138,913 at
September 30, 2000. Accumulated amortization of the leased equipment at
September 30, 2000, was approximately $1,653. Amortization of assets under
capital leases is included in depreciation expense.
F-14
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
NOTE 8--CAPITAL LEASES (CONTINUED)
The future minimum lease payments required under the capital leases and the
present value of the net minimum lease payments as of September 30, 2000, are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30, AMOUNT
------------------------- --------
<S> <C>
2001........................................................ $ 32,732
2002........................................................ 32,732
2003........................................................ 32,732
2004........................................................ 32,732
2005........................................................ 30,003
Thereafter.................................................. --
--------
Total minimum lease payments................................ 160,931
Less: Amount representing interest.......................... 23,976
--------
Present value of net minimum lease payments................. 136,955
Less: Current maturities of capital lease obligations....... 24,360
--------
Long-term capital lease obligations......................... $112,595
========
</TABLE>
NOTE 9--DEBT
BORROWINGS UNDER CREDIT LINE--BANK
In January 2000, the Company established a new credit facility with a bank
that provides for a maximum line of credit of $5.0 million, including letters of
credit. On February 1, 2000 the direct borrowings and acceptances from a former
credit facility were repaid from funds received under the new agreement. The new
line is renewable annually at the discretion of the bank and expires March 31,
2001. There is no formula which limit the borrowings, or restrictive covenants,
as in the prior credit facility. However, the Company is required to eliminate
borrowings for thirty (30) consecutive days and is required to maintain
operating performance which is acceptable to the bank. The Company completed the
thirty-day (30) period in August 2000. The credit facility bears interest at the
prime rate in effect from time-to-time plus three quarters of one percent. At
September 30, 2000, $350,000 was outstanding in direct borrowings; there were no
outstanding obligations under letters of credit.
Interest expense on the bank debt amounted to $70,976 and $61,068 for the
years ended September 30, 2000 and 1999, respectively.
NOTE 10--ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses at September 30, 2000 consist of the following:
<TABLE>
<S> <C>
Accrued expenses relating to relocation..................... $ 79,143
Accrued expenses to vendors and others...................... 424,027
--------
$503,170
========
</TABLE>
F-15
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
NOTE 11--INCOME TAXES
The components of the deferred tax assets and liabilities at September 30,
2000 are as follows:
<TABLE>
<S> <C>
Current:
Accounts receivable....................................... $ 22,700
Inventory................................................. 79,840
Accrued expenses.......................................... 32,460
----------
135,000
==========
Non-current:
Net operating losses...................................... 1,502,562
Property, plant and equipment............................. 24,438
State tax effect.......................................... 89,000
Valuation allowance....................................... (407,000)
----------
1,209,000
----------
Net deferred tax asset...................................... $1,344,000
==========
</TABLE>
At September 30, 2000 a valuation allowance is provided as it is uncertain
if certain deferred tax assets will be fully utilized.
Provision (credit) for income taxes for the years ended September 30,
consists of the following:
<TABLE>
<CAPTION>
2000 1999
-------- ---------
<S> <C> <C>
Current tax expense..................................... $12,500 $ 60,000
Deferred tax expense.................................... 22,629 528,000
Change in valuation allowance........................... 20,000 (193,000)
------- ---------
$55,129 $ 395,000
======= =========
</TABLE>
Reconciliation of statutory rate to effective income for the years ended
September 30, is as follows:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
At the Federal Statutory rate............................... 34.0% 34.0%
Effect of:
Temporary differences..................................... (242.8) (5.2)
Net operating loss carryforwards.......................... 204.0 (28.9)
Deferred income taxes..................................... 47.6 22.2
Miscellaneous............................................. (5.4) 4.1
------ -----
37.4% 26.2%
====== =====
</TABLE>
At September 30, 2000, the Company has unused net operating loss
carryforwards of approximately $3,187,000 expiring through September 30, 2015.
F-16
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
NOTE 12--COMMITMENTS
The Company rents certain of its facilities under leases expiring at various
dates through July 2007. In addition, the Company is leasing four warehouse
facilities on a month-to-month basis. Total rent expense for the years ended
September 30, 2000 and 1999 amounted to $223,135 and $221,465, respectively.
Minimum rental commitments under such leases for future fiscal years are
summarized below:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------
<S> <C>
2001........................................................ $ 73,284
2002........................................................ 75,849
2003........................................................ 78,504
2004........................................................ 81,252
2005........................................................ 84,096
Thereafter.................................................. 154,017
--------
Totals...................................................... $547,002
========
</TABLE>
EMPLOYMENT CONTRACTS
Effective December 11, 1998, the Company entered into a consulting agreement
with its, then current, chairman and chief executive officer, Mr. Theodore
Schiffman. Pursuant to this agreement, Mr. Schiffman receives an annual
consulting fee of $200,000 for a period of five years, commencing January 1,
1999 and ending December 10, 2003. Mr. Schiffman also received severance
payments totaling $350,000, of which $200,000 was paid on January 1, 1999,
$35,000 on September 30, 1999, and $115,000 was paid during Fiscal 2000. In
addition, effective December 11, 1998, the exercise price of his 450,000 options
was reduced to $1.10 per share.
Effective October 1, 1998, the Company entered into an employment agreement
with Mr. Jerome Ball pursuant to which the Mr. Ball 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 (before the impact of other bonuses) in excess of $675,000.
During Fiscal 1999 the Company made a prepayment of $20,000 and accrued an
additional $140,000 for this bonus. In addition, the Mr. Ball received options
to purchase 250,000 shares of common stock at an exercise price of $1.75 per
share, which shares became exercisable during Fiscal 1999. 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. No bonus
was earned in Fiscal 2000 and the Company is presently negotiating renewal of
Mr. Ball's contract.
Effective October 1, 1998, the Company and Mr. Michael Schiffman entered
into a contract with 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 are 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. During the fiscal year
ended September 30, 1999, the Company made prepayments of $25,828 and accrued
$194,172 in connection with this bonus, and 200,000 options vested at a price of
$1.88 (vested on the date sales reached $16,000,000) and 200,000 at $3.25
(vested on the date sales reached $18,500,00). During fiscal year 2000, based on
the Company's performance, the officer was entitled to a bonus of approximately
$42,300, which he elected to forego without recourse.
F-17
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
NOTE 12--COMMITMENTS (CONTINUED)
EMPLOYMENT CONTRACTS
Amounts incurred under employment and severance agreements amounted to
$631,600 and $1,275,767 for the years ended September 30, 2000 and 1999,
respectively (including accrued bonus obligations) and excluding any amounts
foregone.
NOTE 13--RELATED PARTY TRANSACTIONS
NOTE PAYABLE
During Fiscal 1999, a note payable to a related party was paid in full in
the amount of $42,670. Interest amounted to $1,709. No such payments or expenses
were made or incurred in Fiscal 2000.
OTHER
For the year ended September 30, 1999, the Company incurred consulting fees
totaling $71,500 to a corporation that is controlled by a principal stockholder
of the Company. No such payments or expenses were made or incurred in Fiscal
2000.
NOTE 14--STOCKHOLDERS' EQUITY
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 exercised its option to
convert any outstanding notes, then it must convert all of the notes.
On December 4, 1998, the Company paid approximately $72,000 of accrued
interest and converted all the $554,000 of convertible promissory notes into
1,108,000 common shares and warrants to purchase 1,662,000 common shares. These
warrants expired on March 15, 1999 without exercise.
In connection with this conversion, the Company recorded a non-cash,
interest charge of approximately $220,600. This amount represents a beneficial
conversion feature and was calculated as the difference between the price at
which the Company converted such shares ($.50), and the market price of the
Company's stock on the date the debt was issued ($1.81 weighted averaged),
aggregated by the total shares issued. Current accounting rules limit the amount
of the beneficial conversion feature to the face value of the notes ($554,000),
less the amount of discount on the notes previously recognized ($333,400). No
tax benefit was recorded in connection with this interest charge as it is not
deductible for federal income taxes.
F-18
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
NOTE 14--STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS
In February 1995, the Company issued warrants 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 year ended September 30, 1998, the amount charged to
operations and credited to paid-in capital was $9,730. The unexercised warrants
expired on January 31, 1999 and operations for the year ended September 30, 1999
were credited for 62,500 representing the reversal of the related expense.
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:
<TABLE>
<CAPTION>
NUMBER OF SHARES EXERCISE
PER WARRANT PRICE EXPIRATION DATE
---------------- -------- ------------------
<S> <C> <C> <C>
Class A.......................... 1 $3.50 December 31, 1996
Class B.......................... 1 .50* September 30, 1999
</TABLE>
------------------------
* On November 20, 1998, the exercise price was reduced from $5.00 to $.50.
The Class A and Class B warrants have expired. No warrants were exercised in
Fiscal 1998 or 1997.
In Fiscal 1999, 215,500 Class B warrants were exercised.
During Fiscal 1999 the Company issued warrants to three consultants as
partial consideration for services in such areas as investment banking and
stockholder matters.
A summary of warrants outstanding at September 30, 2000, follows:
<TABLE>
<CAPTION>
OUTSTANDING EXPIRATION
ISSUE WARRANTS EXERCISE PRICE DATE VESTED
----- ----------- -------------- ----------------- --------
<S> <C> <C> <C> <C>
Consultant............... 300,000 $1.75* May 20, 2002 75,000
Consultant............... 75,000 $1.75 February 28, 2004 75,000
Consultant............... 5,000 $1.50 July 23, 2001 5,000
------- -------
380,000 155,000
======= =======
</TABLE>
------------------------
* Reflects average exercise price for all warrants granted at prices of $1.50,
$1.75 and $2.00 for three tiers each of 100,000 warrants.
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,
F-19
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
NOTE 14--STOCKHOLDERS' EQUITY (CONTINUED)
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 2000 and 1999.
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 generally vest as follows; 37% after one year,
67% after two years and fully vest after three years. In the years ended
September 30, 1999 and 1998, the Company issued an aggregate of 863,750 options
including 725,000 options to three of the Company's officers. During Fiscal year
2000 the Company granted two new officers 15,000 options each at the current
market price of $1.50.
<TABLE>
<CAPTION>
2000 1999
------------------------------ ------------------------------
EXERCISE EXERCISE
SHARES PRICES SHARES PRICES
--------- ------------------ --------- ------------------
<S> <C> <C> <C> <C>
Balance Beginning of Year........... 1,886,875 $ 1.01--$3.25 1,051,875 $ 1.01--$3.00
Granted............................. 64,000 $ 1.50--$3.38 835,000 $ 1.75--$3.25
Exercised........................... -- --
Cancelled........................... (33,750) $2.00 -- --
--------- ---------
Balance at End of Year.............. 1,917,125 $ 1.01--$3.38 1,886,875 $ 1.01--$3.25
========= =========
</TABLE>
Of the total outstanding options at September 30, 2000, 300,000 options
expire in Fiscal 2001, 689,375 in Fiscal 2007, 28,750 in Fiscal 2008, 835,000 in
Fiscal 2009 and 64,000 in Fiscal 2010. Total options exercisable at
September 30, 2000 were 1,656,005 at a weighted average exercise price of $2.01.
NOTE 15--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
$24,601 and $25,354 for the years ended September 30, 2000 and 1999,
respectively.
F-20
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
NOTE 16--FAIR VALUE OF FINANCIAL INSTRUMENTS
The amounts at which cash and cash equivalents, accounts receivable,
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 following table presents the carrying amounts and fair values at
September 30 2000, for the following:
<TABLE>
<CAPTION>
CARRYING
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Notes Receivable............................................ $143,235 $144,660
Notes Receivable--officers.................................. $418,643 $372,878
</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.
The amount of the capital lease obligations presented in the balance sheet
approximate their fair values due to the use of the Company's incremental
borrowing rate in determining the liability.
NOTE 17--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, 2000
and 1999. If the Company had elected to recognize expense in the year ended
September 30, 2000 and 1999 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>
2000 1999
----------------------- -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net income................................. $92,090 $80,603 $846,865 $447,458
Income per share........................... $ .01 $ .01 $ .14 $ .08
</TABLE>
The fair value of the stock options used to compute pro forma net income 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 27% (1999-38%); risk-free interest rate of
6.0% (1999-6.0%); and an expected holding period of five years.
NOTE 18--BUSINESS SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information" which establishes standards for reporting
information about operating segments, and requires disclosures about products,
geographic areas and major customers.
The Company operates in a single segment that provides soft-sided carrying
solutions for portable electronic devices. This Carrying-Solution Segment
designs and markets products to its customers that include wireless
telecommunications, medical and computer companies. The carrying solution
segment
F-21
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
NOTE 18--BUSINESS SEGMENT INFORMATION (CONTINUED)
operates in geographic regions that include the United States and Europe. Other
geographic sales include Australia and Asia. Segments are defined based
primarily on the location of the customer. Segment information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
(THOUSANDS OF DOLLARS)
----------------------
2000 1999
-------- --------
<S> <C> <C>
Sales:
United States............................................. $ 6,594 $ 5,827
Europe.................................................... 7,636 13,958
Other foreign countries................................... 181 768
------- -------
Total sales............................................. $14,410 $20,553
======= =======
Operating income (loss):
United States............................................. $ 202 $ 72
Europe.................................................... 2,417 4,483
Other foreign countries................................... (11) (101)
Corporate--unallocated.................................... (2,476) (2,800)
------- -------
Total operating income.................................. $ 132 $ 1,654
======= =======
</TABLE>
ALLOCATION OF EXPENSES AND ASSETS:
The Company operates a procurement and quality control center in Hong Kong.
The cost of operating the center is allocated to segments based on their
percentage of sales. The Company does not allocate taxes, other income, other
expense, interest income, interest expense or general and administrative
expenses to individual segments.
IDENTIFIABLE ASSETS:
Identifiable assets by segment are as follows:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
United States............................................... $1,805 $1,366
Europe...................................................... 1,787 4,583
Other foreign countries..................................... 156 273
Unallocated Corporate....................................... 3,189 3,647
------ ------
Total Assets.............................................. $6,937 $9,869
====== ======
</TABLE>
F-22
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
NOTE 18--BUSINESS SEGMENT INFORMATION (CONTINUED)
MAJOR CUSTOMERS:
Sales to the Company's major customers for the year ended September 30, 2000
is as follows:
<TABLE>
<CAPTION>
% OF SEGMENT
REVENUE
-------------------
U.S. EUROPE COMPANY %
-------- -------- ---------
<S> <C> <C> <C>
Customer 1.................................................. 6% 87% 48%
Customer 2.................................................. 26% 9% 17%
</TABLE>
No other single customer comprised more than 10% of segment revenues.
NOTE 19--RESTATEMENT
As a result of a review by the Securities and Exchange Commission ("SEC") of
the accounting treatment accorded by the Company to the issuance of 55.4 units
in a 1997 private placement, the Company has determined to restate its
consolidated balance sheets and consolidated statements of income/operations as
of, and for the years ended, September 30, 1999, 1998 and 1997. See Note 14 for
a description of the private placement. The restatement is a result of a
determination that an alternative method used to value the shares of stock and
the convertible notes, comprising the units sold in the private placement, which
include the recognition of a beneficial conversion feature of $220,592, was
preferable to the method previously used by the Company. The beneficial
conversion feature was calculated as the difference between the price at which
the Company converted such shares, $.50, and the market price of the Company's
stock on the date the debt was issued, $1.81 weighted average, aggregated by the
total shares issued. Generally accepted accounting principles limit the amount
of the beneficial conversion feature to the face value of the notes, $554,000,
less the amount of the discount on the notes previously recognized, $333,408.
The change in valuation of the components of the units issued and the
recognition of the beneficial conversion feature resulted in an increase of
interest expense of $265,912 and the reversal of the extraordinary loss of
$277,000 recognized upon conversion of the notes in 1999. Net income increased
by $11,088 in the fiscal year ended September 30, 1999. Earnings per share
remained at $.14 in 1999.
The cumulative effect of the restatement resulted in an increase of $288,088
to accumulated deficit at October 1, 1998. The effect of the restatement on the
balance sheet at September 30, 1999 was an increase to both accumulated deficit
and paid-in capital of $277,000.
F-23
<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
DESCRIPTION OF YEAR OPERATIONS DEDUCTIONS YEAR
---------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended September 30, 1998....................... $ 91,333 $19,467 -- $110,800
Year ended September 30, 1999....................... 110,800 23,000 -- 133,800
Year ended September 30, 2000....................... $133,800 $ -- $66,035 $ 67,765
</TABLE>
F-24
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
EXHIBIT 11--COMPUTATION OF INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
---------- ----------
<S> <C> <C> <C>
NUMERATOR:
Income from continuing operations:................... $ 92,090 $ 846,865
Preferred dividends.................................. -- --
---------- ----------
92,090 BASIC 846,865
Impact of potential common shares
Convertible debt..................................... -- --
$ 92,090 DILUTED $ 845,865
========== ==========
DENOMINATOR:
Weighted average number of common shares outstanding
(see schedule)....................................... 6,088,516 BASIC 5,751,266
Impact of potential common shares
Stock options and warrants........................... 673,368 70,288
---------- ----------
6,761,884 DILUTED 5,821,554
========== ==========
BASIC EPS:
---------- ----------
Income from operations............................... $ .02 $ .14
========== ==========
DILUTED EPS:
---------- ----------
Income from operations............................... $ .01 $ .14
========== ==========
CALCULATIONS
STOCK OPTIONS
TREASURY STOCK METHOD APPLIED TO STOCK OPTIONS:
Sale of common stock:
Total options and warrants outstanding........... 1,973,125 450,000
Average price.................................... $ 1.66 $ 1.10
---------- ----------
Total.............................................. $3,275,388 $ 495,000
========== ==========
Repurchase of common stock:
Proceeds......................................... $3,275,388 $ 495,000
Average stock price.............................. $ 2.52 $ 1.30
---------- ----------
Shares repurchased................................. 1,299,757 379,712
========== ==========
Net increase in shares:
Shares sold...................................... 1,973,125 450,000
Shares repurchased............................... 1,299,757 379,712
---------- ----------
Increase in shares................................. 673,368 70,288
========== ==========
</TABLE>
F-25
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
COMPUTATION OF WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 2000
--------------------------------------------
SHARES FRACTION OF WEIGHTED AVERAGE
DATES OUTSTANDING OUTSTANDING PERIOD SHARES
----------------- ----------- ----------- ----------------
<S> <C> <C> <C>
October through November.................................... 6,101,641 2/12 1,016,940
Purchase of Treasury Stock.................................. (10,000)
---------
December through January.................................... 6,091,641 2/12 1,015,274
Purchase of Treasury Stock.................................. (5,000)
---------
February.................................................... 6,086,641 1/12 507,220
Purchase of Treasury Stock.................................. (2,500)
---------
March through September..................................... 6,084,141 7/12 3,549,082
---------
WEIGHTED AVERAGE SHARES FISCAL 2000......................... 6,088,516
=========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1999
--------------------------------------------
SHARES FRACTION OF WEIGHTED AVERAGE
DATES OUTSTANDING OUTSTANDING PERIOD SHARES
----------------- ----------- ----------- ----------------
<S> <C> <C> <C>
October through November.................................... 4,798,141 2/12 799,690
Conversion of debt to common stock in February.............. 1,108,000
---------
December through February................................... 5,906,141 3/12 1,476,535
Conversion of Class B Warrants in March..................... 22,000
---------
March though May............................................ 5,928,141 3/12 1,482,035
Conversion of Class B Warrants in June...................... 10,000
---------
June through August......................................... 5,938,141 3/12 1,484,536
Conversion of Class B Warrants in September................. 183,500
Purchase of Treasury Shares................................. (20,000) 508,470
---------
September................................................... 6,101,641 1/12
---------
WEIGHTED AVERAGE SHARES FISCAL 1999......................... 5,751,266
=========
</TABLE>
F-26
<PAGE>
EXHIBIT INDEX
2. PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LITIGATION OR SUCCESSION
<TABLE>
<C> <S>
2.1 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"))
2.2 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)
2.3 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)
</TABLE>
3. ARTICLES OF INCORPORATION AND BY-LAWS
<TABLE>
<C> <S>
3.1 Certificate of Incorporation of the Company as amended
(incorporated by reference to Exhibit 2(a) to the
Form 10-SB)
3.2 By-Laws (incorporated by reference to Exhibit 2(b) to the
Form 10-SB)
3.3 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")
3.4 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)
</TABLE>
4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS
<TABLE>
<C> <S>
4.1 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)
4.2 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)
4.3 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)
4.4 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)
4.5 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)
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
4.6 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) to the Company's Annual Report on
Form 10-KSB for the fiscal year each September 30, 1995.)
4.7 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)
4.8 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)
4.9 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)
4.10 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)
</TABLE>
9. VOTING TRUST AGREEMENT--Not applicable
10. MATERIAL CONTRACTS
<TABLE>
<C> <S>
10.1 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)
10.2 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)
10.3 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)
10.4 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)
10.5 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)
10.6 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)
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.7 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)
10.8 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
10.9 Employment Agreement effective as of October 1, 1998 between
the Company and Jerome E. Ball. incorporated by reference to
the Company's 10-KSB Exhibit 4(t) for the period ended
September 30, 1999.
10.10 Consulting Agreement effective as of October 1, 1998 between
the Company and Theodore H. Schiffman. incorporated by
reference to the Company's 10-KSB Exhibit 4(v) for the
period ended ended September 30, 1999.
10.11 Employment Agreement effective as of October 1, 1998,
between the Company and Michael Schiffman. incorporated by
reference to the Company's 10-KSB Exhibit 4(W) for the
period ended ended September 30, 1999.
</TABLE>
16. LETTER ON CHANGE IN CERTIFYING ACCOUNTANT--
<TABLE>
<C> <S>
16.1 Incorporated by reference to Exhibit 16.1 to the Company's
Current Report on Form 8-K dated June 9, 1997
</TABLE>
21 SUBSIDIARIES OF THE SMALL BUSINESS ISSUER
<TABLE>
<C> <S>
21.1 Incorporated by reference to Exhibit 21 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1995)
</TABLE>
23 CONSENT OF EXPERTS AND COUNSEL--
<TABLE>
<C> <S>
23.1 Consent of Patrusky, Mintz & Semel
</TABLE>
27 FINANCIAL DATA SCHEDULE
<TABLE>
<C> <S>
27.1 Submitted herewith and can be found following the audited
financial statements.*
</TABLE>
------------------------
* Filed herewith
II-3
