<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended DECEMBER 31, 1999.
Or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ____ to ____
Commission file number 0-6669
FORWARD INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 13-1950672
---------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 POST AVENUE, WESTBURY, NY 11590
---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
(516) 338-0700
------------------------------------------------
(Issuer's Telephone Number, including Area Code)
---------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ].
As of February 1, 2000, 6,091,641 Shares of the issuer's Common Stock were
outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
- --------------------------------------------------------------------------------
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
FORM 10-QSB
THREE MONTHS ENDED DECEMBER 31, 1999
CONTENTS
PAGE
----
PART I.FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Consolidated Balance Sheets
as of December 31, 1999 (Unaudited)
and September 30, 1999 3
Consolidated Statements of Income
(Unaudited) for the Three Months
ended December 31, 1999 and 1998 5
Consolidated Statements of Comprehensive Income
for the Three Months ended December 31, 1999 and 1998 6
Consolidated Statements of Cash Flows
(Unaudited) for the Three Months
ended December 31, 1999 and 1998 7
Notes to Form 10-QSB (Unaudited) 9
Item 2. Management's Discussions and Analysis 14
PART II.OTHER INFORMATION 17
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
2
<PAGE>
PART I. ITEM 1. FINANCIAL STATEMENTS
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
---------- ----------
<S> <C> <C>
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 313,784 $1,210,762
Accounts receivable, less allowance for doubtful
accounts of $133,800 and $133,800 4,512,277 4,738,263
Inventories - net 1,926,889 992,064
Notes and loans receivable - current portion 223,879 227,858
Notes and loans receivable - officers - current portion 65,990 28,490
Prepaid expenses and other current assets 415,353 441,002
Deferred income taxes 502,632 502,632
---------- ----------
Total current assets 7,960,804 8,141,071
---------- ----------
PROPERTY, PLANT AND EQUIPMENT - net 617,546 492,427
---------- ----------
OTHER ASSETS:
Deferrred income taxes 689,415 911,395
Note receivable - net of current portion 85,488 126,284
Notes and loans receivable - officers - net of
current portion 95,337 55,471
Other assets 64,121 73,764
Deferred debt costs 6,442 25,769
---------- ----------
940,803 1,192,683
---------- ----------
$9,519,153 $9,826,181
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1999
- ------------------------------------ ----------- -----------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Borrowings and acceptances under credit line $ 802,483 $ 995,852
Accounts payable 1,749,080 2,301,557
Accrued expenses and other current liablilites 1,185,691 1,298,466
Accrued severance to officer 115,000 115,000
----------- -----------
Total current liabilities 3,852,254 4,710,875
----------- -----------
COMMITMENTS
STOCKHOLDER'S EQUITY:
Preferred stock, 4,000,000 authorized shares par
value $.01; none issued -- --
Common stock, 40,000,000 authorized shares, par value
$.01; issued 6,286,531 shares and 6,286,531 shares
(including 194,890 and 184,890 held in treasury) 62,865 62,865
Paid-in capital 7,402.768 7,402,768
Accumulated deficit (1,465,598) (2,048,569)
Foreign currency adjustment (1,342) (589)
----------- -----------
5,998,693 5,416,475
Less: Cost of shares in treasury (331,794) 301,169
----------- -----------
Total stockholders' equity 5,666,899 5,115,306
----------- -----------
$ 9,519,153 $ 9,826,181
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
NET SALES $ 5,862,774 $ 3,963,133
COST OF GOODS SOLD 3,791,082 2,786,407
----------- -----------
GROSS PROFIT 2,071,692 1,176,726
----------- -----------
OPERATING EXPENSES:
Selling 535,423 370,493
General and administration 712,142 651,503
----------- -----------
1,247,565 1,021,996
----------- -----------
INCOME FROM OPERATIONS 824,127 154,730
----------- -----------
OTHER INCOME (DEDUCTIONS):
Interest expense (37,077) (46,339)
Interest expense - related parties -- (950)
Interest income 22,575 7,996
Other income - net (4,674) 16,165
----------- -----------
(19,176) (23,128)
----------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 804,951 131,602
PROVISION FOR INCOME TAXES 221,980 52,641
----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM 582,971 78,961
EXTRAORDINARY ITEM:
Non-cash interest charge upon conversion
of promissory notes (net of income tax
benefit of $ -0-) -- (277,000)
----------- -----------
NET INCOME (LOSS) $ 582,971 $ (198,039)
=========== ===========
NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE:
Basic:
Income before extraordinary item $ .10 $ .02
Extraordinary item -- .(05)
----------- -----------
$ .10 $ (.03)
=========== ===========
Diluted:
Income before Extraordinary Item $ .08 $ .02
Extraordinary item -- (.05)
----------- -----------
$ .08 $ (.03)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 6,098,308 5,167,474
=========== ===========
DIVIDENDS NONE NONE
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
--------------------------
1999 1998
--------- ---------
<S> <C> <C>
NET INCOME (LOSS) $ 582,971 $(198,039)
COMPREHENSIVE INCOME ADJUSTMENTS:
Foreign currency translation (753) (14,450)
--------- ---------
COMPREHENSIVE INCOME (LOSS) $ 582,218 $(212,489)
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
6
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 582,971 $(198,039)
Adjustments to reconcile net income to net cash
provided by (used in) continuing operations:
Extraordinary interest charge -- 277,000
Depreciation and amortization 19,876 9,375
Amortization of deferred debt costs 19,327 22,387
Deferred taxes 221,980 52,641
Changes in assets and liabilities:
Accounts receivable 225,986 724,166
Inventories (934,825) (135,721)
Prepaid expenses and other current assets 25,649 (130,731)
Other assets 9,643 (1,467)
Accounts payable (552,477) 32,159
Accrued expenses and other current liabilities (112,775) (88,659)
Accrued severance to officer -- (3,296)
--------- ---------
NET CASH (USED IN) PROVIDED BY OPERATIONS (494,645) 559,815
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from notes and loans receivable 44,775 107,254
(Loans to) proceeds from notes to officers (77,366) 3,822
Purchases of property, plant and equipment (144,995) (109,811)
Purchase of treasury stock (30,625) --
--------- ---------
NET CASH PROVIDED BY
INVESTING ACTIVITIES (208,211) 1,265
--------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
7
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) short-term borrowings (193,369) (753,488)
Payments of notes payable - related parties -- (15,146)
Deferred offering costs -- (7,500)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (193,369) (776,134)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES (753) 3,267
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (896,978) (211,787)
CASH AND CASH EQUIVALENTS - beginning 1,210,762 703,920
----------- -----------
CASH AND CASH EQUIVALENTS - ending $ 313,784 $ 492,133
=========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 11,024 $ 19,215
Income taxes $ 49,650 $ 10,000
SCHEDULE OF NON-CASH ACTIVITES:
Issuance of common stock upon conversion of -- $ 554,000
long-term debt
Sale of property and equipment held for sale -- $ 86,167
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
8
<PAGE>
FORWARD INDUSTRIES, INC.AND SUBSIDAIRIES
NOTES TO FORM 10-QSB
THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The information in this Form 10-QSB includes the results of operations
of Forward Industries, Inc. ("the Company") and its wholly-owned
subsidiary, Koszegi Industries, Inc. ("Koszegi"), for the periods ended
December 31, 1999 and 1998. The data is unaudited, but includes all
adjustments including the elimination of intercompany accounts and
transactions which are, in the opinion of management, necessary for a
fair presentation of the interim periods presented.
The accounting policies utilized in the preparation of this Form 10-QSB
are the same as those set forth in the Company's annual Form 10-KSB for
the fiscal year ended September 30, 1999 and should be read in
conjunction with the disclosures presented therein.
Certain prior period balances have been reclassified to conform to the
current period classification.
This Quarterly Report may contain forward-looking statements which
involve certain risks and uncertainties. Important factors could arise,
including those indentified in "Risk Factors" in the Company's Form
10-KSB for the year ended September 30, 1999, which could cause the
Company's operating results to differ materially from those contained
in any forward looking statement.
2. EARNINGS PER SHARE
Earnings per share are based on the weighted average number of shares
outstanding during each period presented. The Company has adopted FAS
128, "Earnings Per Share" and has restated prior periods to comply with
the provisions of this pronouncement.
3. BORROWINGS UNDER CREDIT LINE
In April 1998, the Company established a credit facility with a bank
which provides for a maximum line of credit for working capital of $4.5
million, including letters of credit. Borrowing availability is based
on a formula of accounts receivable and inventory. At December 31, 1999
amounts outstanding for direct borrowings were $802,483 and acceptances
were $198,150. The Company was contingently liable under letters of
credit in the amount of $152,740. The credit agreement provides for
certain financial covenants which Forward and Koszegi were in
compliance at December 31, 1999. On February 1, 2000, the direct
borrowings and acceptances were repaid from the proceeds of borrowings
under a new credit agreement, as described below.
In January 2000, the Company established a $5.0 million credit line
with a new bank, Chase Manhattan Bank, to accommodate it's growth.
There are no formula or covenants associated with the line. The Company
is required to eliminate borrowings for 30 consecutive days each year.
4. ISSUANCE OF COMMON STOCK FOR PROMISSORY NOTES
In December 1997, the Company consummated a private offering of
securities consisting of units ("Units"), each Unit comprised of (i)
30,000 shares of Common Stock, (ii) one warrant (a "Private Placement
Warrant") to purchase up to 30,000 shares of Common Stock at $4.00 per
share and (iii) one unsecured convertible promissory note (a "Note") in
the principal amount of $10,000, bearing interest at a rate of 10% per
annum (convertible at the sole option of the Company under certain
circumstances, into 20,000 shares of Common Stock and one Private
Placement Warrant) maturing on December 4, 1998. A total of 55.4 Units
were sold for $25,000 per unit,
9
<PAGE>
aggregating gross proceeds of $1,385,000. Included in the Units sold
was $554,000 aggregate principal amount of convertible promissory
notes. On December 4, 1998, the company exercised its option to convert
all of such Notes into a total of 1,108,000 shares of Common Stock and
Private Placement Warants to purchase 1,662,000 shares of Common Stock.
Interest, which had accrued on such Notes of approximately $72,000, was
paid on that date.
In connection with the conversion of its Notes into Common Stock, the
Company recorded a non-cash, extraordinary charge against earnings of
$277,000 during the prior year's quarter ended Deceember 31, 1998. This
amount, recorded as interest expense, reflects the difference between
the average bid and asked price per share of the Company's stock on
December 4, 1998 (the date on which such conversion occurred) on the
Nasdaq SmallCap Market, $.75, and, the price at which the Company
converted such shares, $.50, aggregated by the total shares issued. No
tax benefit has been recorded in connection with this interest charge
as it is not deductible for federal income taxes.
5. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 SEPTEMBER 30, 1999
----------------- ------------------
(Unaudited)
<S> <C> <C>
Raw materials 38,405 $ 34,662
Finished goods 1,888,484 957,402
---------- --------
$1,926,889 $992,064
========== ========
</TABLE>
10
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1999 1998
--------- ----------
<S> <C> <C>
NUMERATOR
Income from continuing operations:
Income from continuing operations: $ 582,971 $ 78,961
Less: Preferred dividends -- --
---------- ----------
Income available to common stockholders
used in basic EPS 582,971 BASIC 78,961
Income available to common stockholders after
assumed conversions of dilutive securities $ 582,971 DILUTED $ 78,961
========== ==========
Loss from extraordinary item $ -- $ (277.000)
========== ==========
DENOMINATOR
Weighted average number of common shares
outstanding - See schedule 6,098,308 BASIC 5,167,474
Impact of potential common shares:
Stock options and warrants 1,245,981 91,016
Convertible debt N/A N/A
7,344,289 DILUTED 5,258,490
BASIC EPS
Income from continuing operations $ 0.10 $ 0.02
Extaordinary Item -- (0.05)
---------- ----------
$ 0.10 $ (0.03)
========== ==========
DILUTED EPS
Income from continuing operations $ 0.08 $ 0.02
Extraordinary Item -- (0.05)
---------- ----------
$ 0.08 $ (0.03)
========== ==========
</TABLE>
11
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
1999 1998
---------- ----------
<S> <C> <C>
CALCULATIONS
Stock Options
Treasury Stock Method Applied to Stock Options
Sale of common stock
Total options and warrants outstanding 2,483,125 219,000
Average price $ 1.40 $ 0.50
---------- ----------
Total $3,476,375 $ 109,500
========== ==========
Repurchase of common stock
Proceeds $3,476,375 $ 109,500
Average stock price $ 2.81 $ 0.86
---------- ----------
Shares repurchased 1,237,144 127,984
========== ==========
Net increase in shares
Shares sold 2,483,125 219,000
Shares repurchased 1,237,144 127,984
---------- ----------
Increase in shares 1,245,981 91,016
========== ==========
</TABLE>
12
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE
Computation of Weighted Average Number of Common Shares Outstanding
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Weighted
Dates Shares Fraction of Average
Outstanding Outstanding Period Shares
----------- ----------- ------ ------
<S> <C> <C> <C>
October through November 6,101,641 2/3 4,067,761
Treasury stock repurchased in open market
Transactions, in December (10,000)
----------
December 6,091,641 1/3 2,030,547
---------
Weighted Average Shares 6,098,308
=========
<CAPTION>
DECEMBER 31, 1998
Weighted
Dates Shares Fraction of Average
Outstanding Outstanding Period Shares
----------- ----------- ------ ------
<S> <C> <C> <C>
October through November 4,798,141 2/3 3,198,761
Common stock issued in connection with
conversion of private placement debt
in December 1,108,000
---------
December 5,906,141 1/3 1,968,714
---------
Weighted Average Shares 5,167,474
=========
</TABLE>
13
<PAGE>
PART I. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's Financial Statements and the notes thereto appearing
elsewhere in this Report. This Report contains statements which constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company cautions that forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties,(including those identified in "Risk Factors" in the Company's
Form 10-KSB for the year ended September 30, 1999), and that actual results may
differ materially from those in the forward-looking statements as a result of
various factors.
The following discussion and analysis compares the results of the
Company's continuing operations for the three months ended December 31, 1999,
and the three months ended December 31, 1998.
THREE MONTHS ENDED DECEMBER 31, 1999 (THE "1999 QUARTER") COMPARED TO THREE
MONTHS ENDED DECEMBER 31, 1998 (THE "1998 QUARTER").
The 1999 Quarter reflected net income of $583,000 compared to
($198,000) in the 1998 Quarter. Basic earnings per share increased to $.10 in
the 1999 Quarter from ($.03) in the 1998 Quarter, while diluted earnings per
share from continuing operations increased to $.08 in the 1999 Quarter from
($.03) in the 1998 Quarter.
REVENUES.
Net sales increased $1,899,700 (48%) to $5,862,800 in the 1999 Quarter,
from $3,963,100 in the 1998 Quarter. The increase is attributable to growth in
business from both existing and new customers. Sales increases from customers in
the wireless telecommunications industry continues to be a significant
contributor to this growth.
OPERATING INCOME.
Consolidated pretax income from continuing operations increased by
$673,400 to a profit of $805,000 in the 1999 Quarter, from $131,600 in the 1998
Quarter. The increase in pretax profits relates to increases in revenues,
described above, coupled with improved gross margin percentage. The gross profit
increased $895,000 from $1,176,700 in the 1998 quarter to $2,071,700 in the 1999
Quarter, while the gross margin percentage increased from 30% in the 1998
Quarter to 35% in the 1999 Quarter. The higher gross profit percentage is
largely the result of higher revenues without the fixed cost component of a
manufacturing facility. The Company continued to reduce other elements of its
cost of sales as well.
Selling expenses increased $164,900 (45%) from $370,500 in the 1998
Quarter to $535,400 in the 1999 Quarter due to additional investments in
manpower and related selling efforts, along with commissions and travel.
However, the ratio of selling expenses to net sales remained unchanged at 9%
because of an increase in revenues.
General and administrative expenses decreased as a percent of net
sales, to 12% in the 1999 Quarter from 16% in the 1998 Quarter due to higher
revenues but the dollar amount of expenses increased $60,600 (9%) to $712,100 in
the 1999 Quarter from $651,500 in the 1998 Quarter. The increase is primarily
related to bonuses which are predicated on operating performance measures.
OTHER INCOME (DEDUCTIONS).
Total interest expenses decreased by $10,200 to $37,100 in the 1999
Quarter from $47,300 in the 1998 Quarter. The decrease was due to conversion of
the Company's convertible notes into equity in the 1998 Quarter.
Interest and other income - net decreased $6,300 to $17,900 in the 1999
Quarter from the $24,200 1998 Quarter.
14
<PAGE>
EXTRAORDINARY ITEM IN 1998 QUARTER.
In December 1997, the Company consummated a private offering of
securities which included $554,000 in aggregate principal amount of convertible
Promissory Notes. The Notes were converted into Common Stock in December 1998,
at the option of the Company. In connection with the conversion of its Notes
into Common Stock, the Company recorded a non-cash, extraordinary charge against
earnings of $277,000. This amount, recorded as interest expense, reflects the
difference between the average bid and asked price per share of the Company's
stock on December 4, 1998 (the date on which such conversion occurred) on the
Nasdaq SmallCap Market, $.75, and, the price at which the Company converted such
shares, $.50, aggregated by the total shares issued. There was no comparable
item in the 1999 Quarter.
INCOME TAXES.
The provision for income taxes increased by $169,300 due to a $673,300
increase in pretax profits in the 1999 Quarter from the comparable period in
1998 Quarter. The effective tax rates for the 1999 and 1998 Quarters were 28%
and 40%, respectively. The tax rate in the 1999 Quarter was lower due to the
reduction of the valuation allowance established for deferred taxes. No tax
benefit was recorded during the 1998 Quarter relating to the extraordinary
interest charge in the 1998 Quarter as it was not deductible for income tax
purposes.
LIQUIDITY AND CAPITAL RESOURCES.
In the 1999 Quarter, $494,600 of cash was used by operating activities.
This use in operating funds resulted primarily from increases in inventory of
$934,800 and payments and reductions of accounts payable and accrued liabilities
of $665,300 offset by net income of $583,000, reductions in accounts receivables
of $226,000, and the add back of non-cash charges in the deferred tax account of
$222,000 and, depreciation and amortization of $39,200.
Net investing activities in the 1999 Quarter used cash of $208,200. The
Company collected $44,800 of notes receivable, which arose from the sale of its
discontinued operations in 1997 and provided $77,400 in additional loans to
officers, net of collections of loans. In the 1999 Quarter, the Company
purchased 10,000 shares of its common stock in open market transactions, for
$30,600 and $145,000 of property, plant and equipment.
Financing activities in the 1999 Quarter used cash of $193,400. Funds
were used for payments of borrowing under the bank credit line.
In December 1997, the Company consummated the 1997 Private Placement of
Units. Each Unit was comprised of (i) 30,000 shares of Common Stock, (ii) one
Private Placement Warrant to purchase up to 30,000 shares of Common Stock at
$4.00 per share and (iii) one unsecured convertible promissory note. The "Note"
in the principal amount of $10,000, bearing interest at a rate of 10% per annum
(convertible at the sole option of the Company under certain circumstances, into
20,000 shares of Common Stock and one Private Placement Warrant) maturing on
December 4, 1998. A total of 55.4 Units were sold for $25,000 per unit,
aggregating gross proceeds of $1,385,000. Included in the Units sold was
$554,000 aggregate principal amount of debt. A commission in the amount of
$169,000 was paid by the Company in connection with such sales. The sales were
made to accredited investors pursuant to Regulation D promulgated under the
Securities Act of 1933, as amended. On December 4, 1998, the Company exercised
its option to convert $554,000 of debt into 1,108,000 shares of Common Stock and
warrants to purchase 1,662,000 shares of Common Stock, and paid accumulated
interest on the Notes of approximately $72,000. Certain officers and directors
participated in this transaction.
Forward and Koszegi Industries, Inc., a wholly-owned subsidiary of
Forward ("Koszegi"), established a line of credit with a bank in April 1998 and
are indebted to such bank for short-term borrowings and, upon their
presentation, letters of credit. The total line is for $4,500,000. The line of
credit was scheduled to mature on March 31, 2001 (see below). Borrowing
availability is determined based on a formula of accounts receivable and
inventory. The interest rate on the line is the prime rate in effect from time
to time plus three quarters of one percent. The Company secured this line of
credit with all of its assets and those of Koszegi. The facility contains
certain financial covenants for which the Company was in compliance. Amounts
owed the bank at December 31, 1999 including contingent liability for letters of
credit were $1,153,400.
In January, 2000 the Company obtained a $5.0 million credit line with a
new bank to accommodate its growth, and terminated its former credit
arrangement. The new credit line has no borrowing formula or specific covenants.
However a mandatory 30-consecutive-day period, in which there are no outstanding
borrowings, is required along with continued
15
<PAGE>
reasonable business performance. On February 1, 2000 the Company repaid its
outstanding balance at the former bank with the proceeds from initial borrowings
under the new credit line.
In September 1998, the Company commenced a plan intended to streamline
its operations and reduce its cost structure over time. The Company announced a
plan of restructuring, and recorded restructuring charges for its fiscal year
ended September 30, 1998, pursuant to which it closed its manufacturing
operations by February 28, 1999, but continued to provide any required domestic
manufacturing through contractual arrangements with sub-contractors. The vast
majority of its orders are now manufactured overseas. The Company sold to a
subcontractor certain key production equipment and provided technical support,
and maintained quality assurance personnel at its factory. The Company also uses
other third party sub-contracting sources, as appropriate. The Company incurred
expenditures related to the plant shutdown, which were accrued at September 30,
1998. Funds for such expenditures were paid from existing cash or cash generated
by operations.
In addition, the Company renovated a building which it owns, adjacent
to its former leased factory in South Bend, to house its remaining sales staff,
customer support and other administrative personnel who remain in Indiana. The
renovation, which was completed at the end of February 1999, cost approximately
$107,000 and was paid from the Company's existing funds.
The Company, like many others which own computer software, was required
to address the issue of software applications which were unable to recognize
`OO' in their program code. The Company evaluated alternatives to resolve this
problem and concluded that acquiring a new data system, rather than upgrading
its existing systems and applications, was of greater long-term value. The
Company expended approximately $150,000 during fiscal 1999, encompassing the
cost of installing new hardware and software. Such amounts were paid from
existing cash. The Company incurred internal staff costs associated with
training. Cost of staff time was expensed as incurred, while cost of the new
system was capitalized and is being amortized over its useful life. The Company
believes its data systems are Year 2000 compliant.
In connection with its restructuring, the Company hired a new Chief
Executive Officer and received the resignation of Mr. Theodore H. Schiffman, its
co-founder and former Chief Executive Officer. Mr. Schiffman received a
five-year consulting arrangement with annual consulting payments of $200,000 per
year and a severance package totaling $350,000, of which $200,000 was paid on
January 1, 1999, $35,000 on September 30, 1999, $60,000 on January 19, 2000, and
$55,000 is payable on the 15th month anniversary thereof. Such amounts were and
will be paid out of the Company's existing cash position or from internally
generated funds.
The Company determined that for managerial and cost efficiencies it
would close and consolidate its New York and South Bend offices into one office
in Deerfield Beech, Florida. The consolidation is expected to occur during the
third and fourth fiscal quarters. The Company believes that the net cost of the
consolidation will not have a material effect on its financial position in the
current fiscal year, and will have a beneficial impact in subsequent years.
The Company did not incur any other long-term debt in the 1999 Quarter.
At December 31, 1999, there was no long-term debt and all installment note and
capital lease payments were made on a timely basis.
DEFERRED INCOME TAXES.
The Company's balance sheet at December 31, 1999 includes $1,192,000 of
deferred income taxes as an asset. The Company was profitable in the 1999
Quarter, in fiscal year 1999, and in the fiscal year 1998 before restructuring
charges associated with the non-recurring costs of the shutdown of its South
Bend plant, and in the 1998 Quarter, excluding the non-recurring, non-cash
interest charge. However, to the extent that the Company's operations may not be
profitable in future periods, the Company would not be able to realize the
benefit of its deferred tax assets. Without such deferred tax assets, at
December 31, 1999, the Company's stockholder's equity at such date of $5,666,900
would have been reduced by $1,192,000 to a stockholder's equity of $4,474,900
and the Company's working capital at December 31, 1999 would have been reduced
by $502,600 from $4,108,500 to $3,605,900.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 15, 1998, Hollco International Limited ("Hollco"), a
former Asian contractor which manufactured custom carrying cases for the
Company, commenced a claim against the Company in an amount of $140,500
which Hollco alleges that it is owed for cases which it manufactured
under order from the Company. The Company believes that these charges
were offset wholly by product defects and rejects as well as additional
costs incurred by the Company, including air shipment of product to avoid
loss of market share. The Company had charged Hollco by issuing its
invoices for these expenses and may file a separate counter suit against
Hollco for these and other charges to offset any claims of Hollco.
ITEM 2. CHANGES IN SECURITIES
During the Company's fiscal year ended September 30, 1997 and in
December 1997, the Company consummated its 1997 Private Placement of
units ("Units"), each unit comprised of (i) 30,000 shares of Common
Stock, (ii) one warrant to purchase up to 30,000 shares of Common Stock
at $4.00 per share (a "Private Placement Warrant") and (iii) one
unsecured convertible promissory note in the principal amount of $10,000,
bearing interest at a rate of 10% per annum (convertible at the sole
option of the Company under certain circumstances, into 20,000 shares of
Common Stock and one Private Placement Warrant) maturing on December 4,
1998. An aggregate of 55.4 units were sold for $25,000 per Unit,
aggregating gross proceeds of $1,385,000. Included in the Units sold was
$554,000 aggregate principal amount of debt. A commission in the amount
of $169,500 was paid by the Company in connection with such sales. The
sales were made to accredited investors pursuant to Regulation D
promulgated under the Securities Act of 1933, as amended. On December 4,
1998, the Company exercised its option to convert all of such notes into
a total of 1,108,000 shares of Common Stock and Private Placement
Warrants to purchase 1,662,000 shares of Common Stock, and paid interest
which had accrued on the Notes, of approximately $72,000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K
None.
17
<PAGE>
SIGNATURE
In accordance with to the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Dated: February 1, 2000
FORWARD SYSTEMS, INC.
(Registrant)
By: /s/ Philip B. Kart
---------------------------
PHILIP B. KART
Principal Financial Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED BALANCE SHEET AS OF DECEMBER 31, 1999 AND UNAUDITED
STATEMENT OF OPERATIONS FOR THE THREE MONTHS THEN ENDED
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 313,784
<SECURITIES> 0
<RECEIVABLES> 4,646,077
<ALLOWANCES> 133,800
<INVENTORY> 1,926,889
<CURRENT-ASSETS> 7,960,804
<PP&E> 804,310
<DEPRECIATION> 186,764
<TOTAL-ASSETS> 9,519,153
<CURRENT-LIABILITIES> 3,852,254
<BONDS> 0
62,865
0
<COMMON> 0
<OTHER-SE> 6,604,034
<TOTAL-LIABILITY-AND-EQUITY> 9,519,153
<SALES> 5,862,774
<TOTAL-REVENUES> 5,862,774
<CGS> 3,791,082
<TOTAL-COSTS> 3,791,082
<OTHER-EXPENSES> 1,266,891
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,751
<INCOME-PRETAX> 804,951
<INCOME-TAX> 221,980
<INCOME-CONTINUING> 582,971
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 582,971
<EPS-BASIC> 0.10
<EPS-DILUTED> 0.08
</TABLE>
