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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
AMENDMENT NO. 1 TO
(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, 1999
<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 13-1950672
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1801 GREEN ROAD SUITE E. POMPANO BEACH FL 11590
(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/A or any
amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were: $20,553,192.
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 $16,413,400 based on the average of the closing bid price
($2.75) and closing asked price ($2.63) as reported on the NASDAQ SmallCap
Market on December 7, 1999.
As of December 7, 1999, 6,101,641 Shares of the issuer's Common Stock, $.01
par value were outstanding.
The undersigned registrant hereby amends the following items of its Annual
Report on Form 10-KSB for the fiscal year ended September 30, 1999, as set forth
in the pages attached hereto:
PART II
Item 5: Market For Common Stock and Related Stockholder Matters
Item 6: Management's Discussion and Analysis or Plan of Operation
Item 7: Financial Statements
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PART II
ITEM 5--MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET FOR THE COMMON STOCK. The principal market for the Company's Common
Stock is the NASDAQ SmallCap Market. The following table sets forth the high bid
and low bid quotations from the NASDAQ SmallCap Market, for the fiscal quarters
set forth below. These quotations (and those for the Class B Warrants shown
below) represent prices between dealers, do not include retail markup, markdown
or commission and do not necessarily represent actual transactions.
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<CAPTION>
COMMON STOCK
-------------------
PERIOD HIGH BID LOW BID
------ -------- --------
<S> <C> <C>
Fiscal 1999
First Quarter.......................................... $1.06 $ .63
Second Quarter......................................... 1.81 .69
Third Quarter.......................................... 1.81 1.00
Fourth Quarter......................................... 3.56 1.25
Fiscal 1998
First Quarter.......................................... $1.84 $ .53
Second Quarter......................................... 3.62 2.25
Third Quarter.......................................... 3.50 2.31
Fourth Quarter......................................... 3.00 .87
</TABLE>
On December 7 1999, the closing bid quotation for the Common Stock was $2.75
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:
<TABLE>
<CAPTION>
CLASS B WARRANTS
-------------------
PERIOD HIGH BID LOW BID
------ -------- --------
<S> <C> <C>
Fiscal 1999
First Quarter.......................................... $ .05 .05
Second Quarter......................................... .10 .10
Third Quarter.......................................... .50 .13
Fourth Quarter......................................... 1.06 .94
Fiscal 1998
First Quarter.......................................... $1.25 $.63
Second Quarter......................................... -- --
Third Quarter.......................................... 1.00 --
Fourth Quarter......................................... .75 .68
</TABLE>
HOLDERS OF COMMON STOCK. On December 7 1999, there were approximately 246
holders of record of the Company's Common Stock.
HOLDERS OF CLASS B WARRANTS. These Warrants expired on September 30, 1999.
Prior to expiration, holders converted substantially all of the Class B Warrants
into Common Stock.
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DIVIDENDS. The Company has not paid any cash dividends since 1987 and does
not plan to pay cash dividends in the foreseeable future. The payment of
dividends will depend upon the Company's outstanding loan arrangements as well
as its short-term and long-term cash availability, working capital, working
capital needs and other factors, as determined by the Company's Board of
Directors. The Company's current credit arrangements preclude the Company from
paying dividends.
SALE OF UNREGISTERED SECURITIES. On December 4, 1997 the Company
consummated a private offering (the "1997 Private Placement") of securities
consisting of units ("Units"), each Unit comprised of (i) 30,000 shares of
Common Stock, (ii) one warrant (a "Private Placement Warrant ") to purchase up
to 30,000 shares of Common Stock at $4.00 per share and (iii) one unsecured
convertible promissory note (a "Note") in the principal amount of $10,000,
bearing interest at a rate of 10% per annum (convertible at the sole option of
the Company under certain circumstances, into 20,000 shares of Common Stock and
one Private Placement Warrant) maturing on December 4, 1998. A total of 55.4
Units were sold for $25,000 per unit, aggregating gross proceeds of $1,385,000.
Included in the Units sold was $554,000 aggregate principal amount of debt. 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 years ended September 30, 1999 ("Fiscal 1999
Period), 1998 ("Fiscal 1998") and 1997 ("Fiscal 1997"). The information and
comparative data presented herein reflects the elimination of the Company's
advertising specialties division (the "Advertising Specialties division").
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. The restatement
is the 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 includes the recognition of a beneficial conversion
feature of $220,592 and an additional debt discount of $333,408, 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
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conversion feature to the face value of the notes, $554,000, less the amount of
the debt discount on the notes $333,408.
The recognition of the additional debt discount and the beneficial
conversion feature had the following effects on net income (loss):
<TABLE>
<CAPTION>
PER SHARE DATA
-----------------------------------------
NET INCOME (LOSS) BASIC DILUTED
YEARS ENDED ------------------------- ------------------- -------------------
SEPTEMBER 30, AS REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
--------------------- ----------- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
1997 $ 139,434 $ 101,246 $ .04 $ .03 $ .04 $ .03
1998 ($1,078,776) ($1,328,676) ($.23) ($.29) ($.23) ($.29)
1999 * $ 835,777 $ 846,865 $ .14 $ .14 $ .14 $ .14
</TABLE>
------------------------
* The 1999 figures originally reported a $277,000 extraordinary item
associated with the conversion of the notes into common shares. As a result
of the restatement, that amount was reversed and a beneficial conversion
expense of $220,592 and a debt discount of $45,320 recorded as ordinary
interest expense. All other changes are a result of amortizing the
additional debt discount.
The cumulative 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. All amounts presented herein have incorporated the
restatement.
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 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
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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 Fiscal 1998, 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.
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).
TWELVE MONTHS ENDED SEPTEMBER 30, 1998 ("FISCAL 1998") COMPARED WITH TWELVE
MONTHS ENDED SEPTEMBER 30, 1997 ("FISCAL 1997").
The Company's net profit (loss) decreased from $101,200 in Fiscal 1997 to a
loss of ($1,328,700) in Fiscal 1998, a decrease of $1,429,900. The decrease in
Fiscal 1998 was primarily related to two
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non-recurring items, a restructuring charge of $897,400 and officers severance
of $350,000, described below. Basic and diluted earnings per share decreased
from a profit of $.03 to a loss of $.29 in Fiscal 1998.
REVENUES
Net sales increased $292,600 (2%) to $13,028,900 in Fiscal 1998, from
$12,736,300 in Fiscal 1997. Custom case sales increased by $658,900, which was
partially offset by a decrease of $366,300 from the Company's Terrapin line. The
decrease in retail Terrapin-Registered Trademark- sales is partially the result
of an initial stocking position ordered by one customer during Fiscal 1997 which
did not reoccur in Fiscal 1998, however generally the sales of Terrapin have not
met expectations. The Company is currently evaluating business strategies for
its computer case product line. Higher custom case sales reflect increased
demand primarily from two of the Company's major customers, as well as selected
new accounts.
OPERATING INCOME
Consolidated income (loss) from continuing operations before tax decreased
by $2,266,200 to a loss of ($1,262,700) in Fiscal 1998 from a profit of
$1,003,500 in Fiscal 1997. The decrease relates, in part, to two non-recurring
charges to operations; the first, for $897,400 relates to restructuring charges
associated with the shutdown of the Company's factory in South Bend, Indiana,
and the second, for $350,000 for severance amounts payable to the Company's
Chief Executive Officer.
In addition, gross profit decreased $688,400 to $3,707,600 in Fiscal 1998
from $4,396,000 in Fiscal 1997. The gross profit percent decreased from 34.5% in
Fiscal 1997 to 28.5% in Fiscal 1998. The decrease is attributable primarily to
the Company's Terrapin-Registered Trademark- line where competitive costs of
retail selling, as well as selected inventory reserves caused a decrease in
gross profit of $409,000. The custom case line gross profit deceased $279,400 as
a result of certain inventory reserves in Fiscal 1998 due to certain high margin
orders received in Fiscal 1997.
Selling expenses increased by $68,300 (5%) from $1,371,400 in Fiscal 1997 to
$1,439,700 in Fiscal 1998. The ratio of selling expenses to net sales was 11% in
both Fiscal 1998 and 1997. The increase in selling expenses in Fiscal 1998 was
primarily the result of an increase in commissions.
General and administrative expenses, increased as a percentage of net sales,
from 16% in Fiscal 1997 to 17% in Fiscal 1998, while the amount increased
$268,800 (14%) to $2,253,400 in Fiscal 1998 from $1,984,600 in Fiscal 1997. The
increase in general and administrative expenses is attributable, in part, to the
accounting treatment related to the sale of the business which represented
discontinued operations. This business was sold effective September 30, 1997.
For accounting purposes, a portion of certain of Fiscal 1997 salaries,
professional fees, telephone and other related administrative expenses were
allocated to this business and included in the discontinued operations, not in
general and administrative expenses. Upon the divestment of this business line,
the remaining business absorbed all of such costs as general and administrative
expenses. As a result, Fiscal 1998 numbers appear to increase substantially. In
addition, there were increases in travel ($42,000) relating to overseas
business, and professional fees ($77,000) in part due to employment contracts,
potential acquisitions, and the MedCovers Inc. production contract.
Restructuring charges of $897,400 were incurred in Fiscal 1998 relating to
the shutdown of the Company's South Bend, Indiana production facility. The
majority of the Company's products are manufactured overseas and the plant was
operating at substantially below its capacity.
Severance expense to a co-founder of the Company was recorded in the amount
of $350,000 in Fiscal 1998 Fiscal; no comparable amount was included in Fiscal
1997 Fiscal.
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OTHER INCOME
Total interest expenses increased by $349,000 to $529,700 in Fiscal 1998
from $180,700 in Fiscal 1997. The increase is due to, interest associated with
the indebtedness issued in connection with the Company's 1997 Private Placement
including amortization of debt discount in Fiscal 1998 in the amount of $249,900
and the Company's new bank credit line which are included in interest expense.
The Company's rental building in Brooklyn, New York was not leased during
Fiscal 1997 or rented in Fiscal 1998. Rental income--net decreased to a loss of
$60,700 in Fiscal 1998 from a loss of $106,200 in Fiscal 1997. This property was
sold in December 1997. [See discussion below.]
Interest and other income--net increased $835,800 in Fiscal 1998 from Fiscal
1997 resulting primarily from the sale of property described above. The Company
recorded a pretax gain on this sale of approximately $669,000.
INCOME TAXES
The Company incurred a loss before income taxes in Fiscal 1998 and should
have recorded an income tax credit. Due to effects of temporary and permanent
differences, the Company had taxable income before net operating loss
carryforwards.
The provision for income taxes increased by $35,600. Current income taxes
increased by $12,300. The Company accrued current taxes of $18,700 which
represented federal alternative tax and state and local taxes. In Fiscal 1997,
current taxes amounted to $6,400.
Deferred income taxes increased by $23,300. Deferred income taxes decreased
by $456,300 as a result of applying the balance sheet approach of calculating
deferred tax assets. The Company increased its valuation allowance by $479,600
as it is uncertain if certain deferred tax assets will be fully utilized.
LIQUIDITY AND CAPITAL RESOURCES
In Fiscal 1999, $700,200 of cash was generated by operating activities. This
increase in operating funds resulted primarily from net income of $835,800, an
increase in accounts payable and accrued expenses of $1,086,000; the add back of
a beneficial intgerest charge of $220,600; a decrease in deferred taxes of
$335,000 and a decrease in prepaid and other assets, net, of $73,900. Offsetting
these amounts was an increase in accounts receivable of $1,842,600. Credit terms
to customers are generally net thirty days from shipment of product to a
customer. In certain situations, the Company may warehouse inventory at customer
specified locations to expedite delivery and invoice upon issuance from the
warehouse.
Net investing activities in Fiscal 1999 provided cash of $50,500. The
Company collected $342,400 of notes receivable, which arose from the sale of its
discontinued operations in 1997, $32,300 of loans made to its officers, and
received $51,100 from the sale of assets. In Fiscal 1999, the Company purchased
$375,300 of property, plant and equipment.
Financing activities in Fiscal 1999 used cash of 261,000. Funds were used
for repayment of indebtedness under the bank credit line of $248,300, note
payments to a related party of $42,700 and $14,800 for expenses in connection
with the note conversion described below and debt costs. The Company also
repurchased 20,000 shares of its Common Stock in open market transactions,
aggregating a cost of $63,000. Offsetting these amounts were the exercise of
Class B warrants into common shares. Prior to their expiration on September 30,
1999, 215,500 Class B Warrants were exercised at $.50 per share, into 215,500
common shares aggregating $107,800.
In December 1997, the Company consummated Fiscal 1997 Private Placement of
Units. Each Unit was comprised of (i) 30,000 shares of Common Stock, (ii) one
Private Placement Warrant to purchase
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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 which
was discounted $333,400. 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 (such Warrants expired on March 15, 1999 and
are no longer outstanding), and paid accumulated interest on the Notes of
approximately $72,000.Upon conversion, the Company recorded a one time, non-cash
interest charge of $220,600 which reflects the beneficial conversion features of
the transaction. 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 letters of credit. The total
line is for $4,500,000. The line of credit is scheduled to mature on March 31,
2001. Borrowing availability is determined based on a formula of accounts
receivable and inventory. The interest rate on the line is the prime rate in
effect, from time to time, plus three quarters of one percent. The Company
secured this line of credit with all of its assets and those of Koszegi. The
Company used the new credit availability to pay its outstanding indebtedness on
its former credit line of $937,000. In addition, the Company also used the
facility to repay outstanding letters of credit financed by a third party. The
new facility contains certain financial covenants for which the Company was in
compliance. At September 30, no amounts were owed at the bank for direct
borrowings but the Company was liable for bankers acceptances of $995,900. In
addition, the Company did have a contingent liability for letters of credit and
bankers acceptances totaling $2,434,400.
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 South Bend, Indiana
manufacturing operations on February 28, 1999, but continued to provide required
domestic manufacturing through subcontractors. However, the vast majority of the
Company's orders are now manufactured overseas. The Company sold to
MedCovers Inc., of Raleigh, North Carolina certain key production equipment, and
provided technical support and quality assurance personnel at MedCovers factory.
The Company also uses other third party sources for such production as
appropriate. The Company incurred cash expenditures during the current year
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. The contract with MedCovers is currently being reevaluated and may
be cancelled to provide an open arrangement where MedCovers would not be the
primary contractor.
In addition, the Company renovated a building, which it owns, adjacent to
its former leased factory in South Bend, to house its remaining sales staff,
customer support and other administrative personnel who remain in Indiana. The
renovation, which was completed at the end of February 1999, at a cost of
approximately $107,000, 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 are unable to recognize "OO' in
their program code. The Company evaluated alternatives to resolve this problem
and concluded that acquiring a new data system, rather than upgrading its
existing systems and applications, was of greater long-term value. The Company
expended approximately $150,000 during fiscal 1999, encompassing the cost of new
hardware and software. Such amounts were paid from existing cash. The Company
incurred internal staff costs
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associated with training. Cost of staff time was expensed as incurred, while
cost of the new system is being capitalized and 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 was paid on September 30,1999 and $115,000 is scheduled
to be paid on the 15th month anniversary thereof, January 1, 2000. Such amounts
were and will be paid out of the Company's existing cash position or from
internally generated funds.
The Company did not incur any other long-term debt in Fiscal 1999. At
September 30, 1999, there was no long-term debt and all installment note and
capital lease payments were made on a timely basis.
DEFERRED INCOME TAXES
The Company's balance sheet at September 30, 1999 includes $1,414,000 of
deferred income taxes as an asset. The Company was profitable in Fiscal 1999 and
in Fiscal 1998, before restructuring charges associated with the non-recurring
costs of the shutdown of its South Bend plant, and in Fiscal 1997. 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, 1999, the
Company's stockholder's equity at such date of would have been reduced by
$1,414,000 to a stockholder's equity of $3,701,300 and the Company's working
capital at September would have been reduced by $502,600 from $3,430,200 to
$2,927,600.
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RISK FACTORS
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
All cautionary statements made in this Annual Report on Form 10-KSB should
be read as being applicable to all related forward-looking statements wherever
they appear. Investors should consider the following risk factors as well as the
risks described elsewhere in this Annual Report on Form 10-KSB.
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. For Fiscal 1999,
one of the Company's customers, together with its international affiliates,
accounted for approximately 60% of the Company's sales. In Fiscal 1998, two
customers accounted for approximately 39% and 16%, respectively, 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 in extending credit
to customers, at September 30, 1999, one customer and its international
affiliates accounted for approximately 79% of the Company's accounts receivable,
and three customers and their international affiliates accounted for
approximately 67% of the Company's accounts receivable at September 30, 1998.
The failure of any of such customers to pay the Company such amounts when and as
due would have a material adverse effect on the Company.
DEPENDENCE ON FOREIGN MANUFACTURERS.
During Fiscal 1999, 1998 and 1997, approximately 93%, 78%, and 63%,
respectively, of the Company's carrying cases were manufactured overseas
(primarily in Asia) by various contractors. The Company does not have any
written agreements with any of such contractors to continue to supply the
Company with finished product. In order to maintain competitive pricing, it is
anticipated that the use of overseas contractors will maintain its current level
or increase. During Fiscal 1999, the Company expanded the number of oversees
contractors it utilizes to disperse its risk with any one of them. Any
interruption in this source of supply would have a material adverse effect on
the Company. Utilizing foreign sources of supply requires additional advanced
planning and control and more rapid payment for merchandise, and such sources
are subject to special risks such as potential political instability,
unanticipated trade restrictions, war and shipping delays.
POSSIBLE INABILITY TO REALIZE BENEFIT OF DEFERRED INCOME TAX ASSETS.
The Company's balance sheet at September 30, 1999 includes deferred tax
assets aggregating $1,414,000 or approximately 14% of the Company's total
assets, which $502,600 is classified as current. To the extent that the
Company's operations are not profitable, the Company would not be able to
realize the benefit of its deferred tax assets. Without such deferred tax
assets, at September 30, 1999, the Company's shareholders' equity at such date
of $5,115,300 would have been reduced by $1,414,000 to a shareholders' equity of
$3,701,300.
The Company's belief that its deferred tax assets will be realized is based
upon a number of factors. The Company has been in business for over 35 years.
Although the Company sustained a loss from continuing operations during Fiscal
1996 and Fiscal 1995, the Company had net income in Fiscal 1997, Fiscal 1998
(before non-recurring adjustments for the shutdown of its South Bend plant and
10
<PAGE>
severance to an officer) and Fiscal 1999. The Company has continued to
streamline its fixed operating costs through the sale of a building and shutdown
of its production facility. It believes its current operating conditions
provides significantly more control of its costs. 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.
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, Michael Schiffman,
President, and Theodore H. Schiffman, Chairman Emeritus. The Company has
employment agreements with Jerome E. Ball for a term expiring September 30,
2000, a consulting agreement with Theodore H. Schiffman for a term expiring in
2003, and with Michael Schiffman for a term expiring September 30, 2001. The
business of the Company would be materially and adversely affected if the
Company lost the services of any of such individuals. The Company does not have
key person life insurance as to any of such individuals.
ABSENCE OF CASH DIVIDENDS.
The Company has not paid any cash dividends in more than ten years. The
payment of future cash dividends by the Company, if any, will depend upon the
Company's short-term and long-term cash availability, working capital, working
capital needs and other factors, as determined by the Company's Board. The
Company is restricted from paying dividends under its new credit facility. The
Company does not anticipate that cash dividends will be paid in the foreseeable
future.
CONTROL BY INSIDERS.
Members of the Board, including the Company's Chief Executive Officer,
Chairman-Emeritus, and President, together with its Chief Financial Officer and
Secretary, directly or indirectly, beneficially own 2,494,152 shares of Common
Stock, aggregating approximately 32% of the issued and outstanding capital stock
of the Company. By virtue of their ownership of such Common Stock, such
executive officers and directors or their affiliates may, collectively, be
deemed to control the Company through the exercise of sufficient voting power to
effectively control (or, at least, exercise a significant influence upon) the
election of the Company's Board, direct the appointment of the Company's
officers and, in general, significantly influence the outcome of any corporate
transaction or other matter submitted to the Company's shareholders for
approval, including mergers, consolidations and the sale of all or substantially
all of the Company's assets, and to prevent or cause a change in control of the
Company.
EFFECT OF OUTSTANDING OPTIONS AND WARRANTS.
For the respective terms of outstanding options, warrants granted by the
Company, the holders thereof are given an opportunity to profit from a rise in
the market price of the Company's Common Stock. As of December 7, 1999,
2,266,875 shares of Common Stock (or an additional 34% of the outstanding Common
Stock) are issuable upon the exercise or conversion of such securities at prices
ranging from $1.75 to $3.25 per share. In November 1996, the Company's Board
adopted, and in August 1997, the Company's shareholders approved, the Company's
1996 Stock Incentive Plan (the "Plan"), pursuant to which up to 8,000,000 shares
of Common Stock may be issued to officers and employees of the Company upon the
exercise of incentive stock options and nonqualified stock options.
11
<PAGE>
Options (including vested and non-vested options) to purchase up to 1,886,875
shares of Common Stock, included in the figure above, have been granted under
such Plan as of December 7, 1999. The terms on which the Company may obtain
additional financing during the respective terms of these stock options,
warrants and other convertible securities may be adversely affected by their
existence. The holders of such stock options and warrants may exercise such
securities at a time when the Company might be able to obtain additional capital
through a new offering of securities or other form of financing on terms more
favorable than those provided by such stock options and warrants.
POTENTIAL ANTI-TAKEOVER MEASURES.
The Company is authorized to issue up to 4,000,000 shares of "blank check"
preferred stock. The Board has the authority, without shareholder approval, to
issue preferred stock in one or more series and to fix the relative rights and
preferences thereof including their redemption, dividend and conversion rights.
The ability of the Company to issue the authorized but unissued shares of
preferred stock could be utilized to impede potential take-overs of the Company.
RISKS OF LOW-PRICED STOCKS.
The Commission has adopted regulations which define a "penny stock" to be
any equity security that has a market price (as therein defined) of less than
$5.00 per share or an exercise price of less than $5.00 per share, subject to
certain exceptions. For any transaction involving a penny stock, unless exempt,
the rules require the delivery, prior to any transaction in a penny stock, of a
disclosure schedule prepared by the Commission relating to the penny stock
market. Disclosure is also required to be made about commissions payable to both
the broker-dealer and the registered representative and current quotations for
the securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stocks. The foregoing penny stock restrictions
will not apply to the Company's securities if such securities continue to be
listed on the Nasdaq SmallCap Market, as to which there can be no assurance, and
have certain price and volume information provided on a current and continuing
basis or meet certain minimum net tangible assets or average revenue criteria.
In any event, even if the Company's securities were exempt from such
restrictions, it would remain subject to Section 15(b)(6) of the Exchange Act,
which gives the Commission the authority to prohibit any person engaged in
unlawful conduct while participating in a distribution of penny stock from
associating with a broker-dealer or participating in a distribution of penny
stock, if the Commission finds that such a restriction would be in the public
interest. If the Company's securities were to be removed from listing on the
Nasdaq SmallCap Market or otherwise become subject to the existing rules on
penny stocks, the market liquidity for the Company's securities could be
severely adversely affected.
RISK OF LOSS OF LISTED STATUS OF COMMON STOCK ON THE NASDAQ SMALLCAP MARKET.
The National Association of Securities Dealers listing requirements require,
among other things, that all issuers of securities listed on the Nasdaq SmallCap
Market maintain a continued minimum bid price per share of such securities of
$1.00. The per share price of the Company's Common Stock as of December 7, 1999
was $2.75. There can be no assurances that the per share price of the Company's
Common Stock will stay 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 6,104,131 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 and
12
<PAGE>
under certain circumstances may be sold without registration pursuant to such
rule. The Company is unable to predict the effect that sales made under
Rule 144, or otherwise, may have on the then prevailing market price of the
Company's securities although any future sales of substantial amounts of
securities pursuant to Rule 144 could adversely affect prevailing market prices.
HONG KONG--TRANSFER OF SOVEREIGNTY.
A portion of the operations of the Company are currently located in Hong
Kong. As a result, the Company's business, results of operations and financial
condition may be influenced by the political situation in Hong Kong and by the
general state of the Hong Kong economy. On July 1, 1997, sovereignty over Hong
Kong transferred from the United Kingdom to the People's Republic of China, and
Hong Kong became a Special Administrative Region of China (an "SAR"). As
provided in the Sino-British Joint Declaration on the Question of Hong Kong and
the Basic Law of the Hong Kong SAR of China (the "Basic Law"), the Hong Kong SAR
will have a high degree of autonomy except in foreign and defense affairs. Under
the Basic Law, the Hong Kong SAR is to have its own legislature, legal and
judicial system and full economic autonomy for 50 years. However, there can be
no assurance that the transfer of sovereignty and changes in political or other
conditions will not result in an adverse impact on the Company's business,
results of operations or financial condition.
ITEM 8--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT'S ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
Dated: January 20, 2001 FORWARD INDUSTRIES, INC.
By: /s/ DOUGLAS W. SABRA
-----------------------------------------
Douglas W. Sabra
CHIEF FINANCIAL OFFICER AND VICE PRESIDENT
(PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL
ACCOUNTING OFFICER)
</TABLE>
14
<PAGE>
ITEM 7--FINANCIAL STATEMENTS
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
REPORT ON
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED SEPTEMBER 30, 1999
CONTENTS
<TABLE>
<CAPTION>
PAGE
-------------------
<S> <C>
INDEPENDENT AUDITORS' REPORT................................ F-2
CONSOLIDATED BALANCE SHEETS................................. F-3
CONSOLIDATED STATEMENTS OF OPERATIONS....................... 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 - F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-9 - F-23
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS............ F-24
EXHIBIT 11 -- COMPUTATION OF INCOME PER COMMON SHARE........ F-25 - F-27
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS'
FORWARD INDUSTRIES, INC.
WESTBURY, NEW YORK
We have audited the accompanying consolidated balance sheet of Forward
Industries, Inc. and Subsidiaries as of September 30, 1999, and the related
consolidated statements of operations, comprehensive income, changes in
stockholders' equity, and cash flows for the years ended September 30, 1999 and
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Forward
Industries, Inc. and Subsidiaries as of September 30, 1999, and the results of
their operations and their cash flows for the years ended September 30, 1999 and
1998 in conformity with generally accepted accounting principles.
We have audited Schedule II and Exhibit 11 of the Company for the year ended
September 30, 1999 and 1998 included in Fiscal 1999 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 20, the accompanying financial statements for the year
ended September 30, 1998 and September 30, 1999 have been restated.
<TABLE>
<S> <C>
/s/ Patrusky, Mintz & Semel
-------------------------------------------
PATRUSKY, MINTZ & SEMEL
CERTIFIED PUBLIC ACCOUNTANTS
</TABLE>
NEW YORK, NEW YORK
December 7, 1999 except for
Note 20, as to which the
date is December 8, 2000.
F-2
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
<TABLE>
<S> <C>
ASSETS (NOTE 8)
CURRENT ASSETS:
Cash and cash equivalents................................. $1,210,762
Accounts receivable, less allowance for doubtful accounts
of $133,800............................................... 4,738,263
Inventories (Note 3)...................................... 992,064
Notes receivable--current portion (Note 4)................ 227,858
Notes and loans receivable--officers--current portion
(Note 6).................................................. 28,490
Prepaid expenses and other current assets (Note 7)........ 441,002
Deferred income taxes (Note 11)........................... 502,632
----------
Total current assets.................................... 8,141,071
----------
PROPERTY, PLANT AND EQUIPMENT--net--(Note 5)................ 492,427
----------
OTHER ASSETS:
Deferred income taxes (Note 11)........................... 911,395
Note receivable--net of current portion (Note 4).......... 126,284
Deferred debt costs....................................... 25,769
Notes and loans receivable--officers--net of current
portion (Note 6).......................................... 55,471
Other assets.............................................. 73,764
----------
Total other assets...................................... 1,192,683
----------
TOTAL ASSETS................................................ $9,826,181
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Acceptances due to bank (Note 8).......................... $ 995,852
Accounts payable.......................................... 2,301,557
Accrued expenses and other current liabilities (Note
10)..................................................... 1,298,466
Accrued severance to officer.............................. 115,000
----------
Total current liabilities............................... 4,710,875
----------
COMMITMENTS (Note 12)
STOCKHOLDERS' EQUITY:
Preferred stock, 4,000,000 authorized shares, par value
$.01; none issued....................................... --
Common stock, 40,000,000 authorized shares, par value
$.01; issued 6,286,531 shares
(including 184,890 held in treasury) (Note 14).......... 62,865
Paid-in capital........................................... 7,679,768
Accumulated deficit....................................... 2,325,569
Foreign currency adjustment............................... (589)
----------
5,416,475
Less: Cost of shares in treasury.......................... 301,169
----------
Total stockholders' equity.............................. 5,115,306
----------
TOTAL LIABILITES AND STOCKHOLDERS' EQUITY................... $9,826,181
==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
NET SALES................................................... $20,553,192 $13,028,888
COST OF GOODS SOLD.......................................... 14,307,809 9,351,053
----------- -----------
GROSS PROFIT................................................ 6,245,383 3,677,835
----------- -----------
OPERATING EXPENSES:
Selling................................................... 1,791,043 1,439,734
General and administrative................................ 2,800,011 2,253,370
Restructuring charge (Note 2)............................. 897,383 --
Severance to officer (Note 12)............................ -- 350,000
----------- -----------
4,591,054 4,940,487
----------- -----------
INCOME (LOSS) FROM OPERATIONS............................... 1,654,329 (1,262,652)
----------- -----------
OTHER INCOME (DEDUCTIONS):
Interest expense.......................................... (337,646) (529,725)
Interest expense--related parties......................... (1,709) (22,529)
Interest income........................................... 79,553 54,922
Rental income--net........................................ -- (60,730)
Other income (deductions)--net............................ (152,660) 772,186
----------- -----------
(412,462) 214,124
----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES............. 1,241,865 (1,048,528)
PROVISION FOR INCOME TAXES (Note 11)........................ 395,000 280,148
----------- -----------
NET INCOME (LOSS)........................................... $ 846,865 ($1,328,676)
=========== ===========
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
(Note 17):
Basic:
Income (loss)........................................... $ . 14 $ (.29)
=========== ===========
Diluted:
Income (loss)........................................... $ .14 $ (.29)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING (Note 17)..............................
Basic..................................................... 5,751,266 4,650,641
=========== ===========
Diluted................................................... 5,821,554 4,650,641
=========== ===========
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
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
------------------------
1999 1998
--------- ------------
<S> <C> <C>
NET INCOME (LOSS)........................................... $846,865 $(1,328,676)
COMPREHENSIVE ADJUSTMENT-Foreign translation:............... 17,128 (17,717)
-------- -----------
COMPREHENSIVE INCOME (LOSS)................................. $863,993 (1,346,393)
======== ===========
</TABLE>
F-5
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1998
-----------------------------------------------------------------------------------------------------
COMMON STOCK TREASURY STOCK
---------------------------------- RETAINED -----------------------
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, 1997 as
previously reported..... $4,228,694 4,303,031 $43,030 $6,229,347 $(1,805,570) -- (164,890) $ (238,113)
---------- --------- ------- ---------- ----------- -------- -------- ----------
Adjustment for debt
discount................ 163,108 -- -- 201,296 (38,188) -- -- --
---------- --------- ------- ---------- ----------- -------- -------- ----------
October 1, 1997, as
restated................ 4,391,802 4,303,031 $43,030 $6,430,643 $(1,843,758) -- (164,890) $ (238,113)
Common stock issued in
connection with private
placement (note 14)..... 424,612 585,000 5,850 418,762 -- -- -- --
Deferred offering costs... (94,774) -- -- (94,774) -- -- -- --
Exercise of options....... 121,500 75,000 750 120,750 -- -- -- --
Issuance of warrants for
services rendered (Note
14)..................... 9,730 -- -- 9,730 -- -- -- --
Foreign currency
translation
adjustment.............. (17,717) -- -- -- -- (17,717) -- --
Net loss.................. (1,328,676) -- -- -- (1,328,676) -- -- --
---------- --------- ------- ---------- ----------- -------- -------- ----------
BALANCE
September 30, 1998........ $3,506,477 4,963,031 $49,630 $6,885,111 $(3.172.434) $(17,717) (164,890) $ (238,113)
========== ========= ======= ========== =========== ======== ======== ==========
YEAR ENDED SEPTEMBER 30, 1999
-----------------------------------------------------------------------------------------------------
BALANCE
October 1, 1998,.......... 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)
========== ========= ======= ========== =========== ======== ======== ==========
</TABLE>
------------------------------
Note- Preferred stock is not shown as no shares have been issued.
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 846,865 $(1,328,676)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) continuing operations:
Beneficial interest charge................................ 220,592 --
Gain on sale of property and equipment.................... (68,299) (668,962)
Amortization of note discount............................. 45,320 249,900
Depreciation and amortization............................. 132,566 247,733
Deferred taxes............................................ 335,000 261,448
Reduction of property and equipment to net realizable
value................................................... -- 202,096
Non-cash compensation (reversal).......................... (62,500) 9,730
Changes in assets and liabilities:
Accounts receivable..................................... (1,831,420) (18,250)
Inventories............................................. 91,598 (148,650)
Prepaid expenses and other current assets............... 73,903 (182,134)
Other assets............................................ (14,352) 52,836
Accounts payable........................................ 1.085,985 (721,327)
Accrued severance to officer............................ (235,000) 350,000
Accrued expenses and other current liabilities.......... 79,892 731,770
---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES......... 700,150 (962,286)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of division............................ -- 492,785
Proceeds from sale of property and equipment.............. 51,130 824,356
Proceeds from notes and loans receivable.................. 342,446 275,436
Proceeds from collections from officers................... 32,312 53,083
Purchases of property, plant and equipment................ (375,335) (160,159)
---------- ----------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES......... 50,553 1,485,501
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments of) short-term borrowings......... (248,251) (131,002)
Proceeds from long-term notes............................. -- 10,000
Payments of long-term notes............................... -- (234,697)
Payments of mortgage...................................... -- (1,057,748)
Payments of note payable--related party................... (42,670) (46,030)
Proceeds from issuance of stock........................... 107,750 414,000
Purchase of Treasury Shares............................... 63,056) --
Deferred offering costs................................... (11,950) (27,832)
Deferred debt cost........................................ (2,812) (93,469)
---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES......... (197,933) (1,166,778)
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES............................. 17,128 (17,717)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 506,842 (661,280)
CASH AND CASH EQUIVALENTS--beginning........................ 703,920 1,365,200
---------- ----------
CASH AND CASH EQUIVALENTS--ending........................... $1,210,762 $ 703,920
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------
1999 1998
---------- ---------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................ $ 69,913 $171,695
Income taxes............................................ $ 6,258 $ 13,145
SCHEDULES OF NON-CASH ACTIVITIES:
Warrants issued (lapsed) for services rendered.......... $ (62,500) $ 9,730
Forgiveness of mortgage debt............................ -- 55,529
Offset of deferred offering costs to be paid in
capital............................................... -- 66,942
Issuance of promissory notes upon closing of private
placement units....................................... -- 185,000
Issuance of note receivable for amounts due on sale of
division.............................................. -- 80,000
Conversion of debt into equity.......................... 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-8
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
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 devices such as cellular phones, medical devices and computers. The
Company markets products either as a direct seller or as an
other-equipment-manufacturer to customers in the United States, Europe, Asia and
Australia. For the years ended September 30, 1999 and 1998, respectively,
approximately 71% and 31% of its sales were to customers outside of the United
States.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Forward
Industries, Inc. ("Forward") and its wholly- and majority-owned subsidiaries
(together the "Company"). All significant intercompany transactions and balances
have been eliminated in consolidation.
REVENUE RECOGNITION
Revenue is recognized upon the shipment of products.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid money market accounts.
CREDIT RISK
ACCOUNTS RECEIVABLE--TRADE
Accounts receivable consist of open trade accounts with various companies.
The Company performs ongoing credit evaluations of its customers and believes
that adequate allowances for any uncollectible receivables are maintained.
Credit terms to customers are generally net thirty (30) days. The Company has
not historically experienced significant losses in extending credit to
customers.
One customer accounted for 79%, and three customers accounted for 67% of the
company accounts receivable at September 30, 1999 and 1998, respectively. These
customers are substantial companies with good credit worthiness. None of these
customers are in default and payments are received from them on a timely basis.
In 1999 one customer accounted for 60%, and in 1998, two customers accounted for
55% of net sales.
F-9
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
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 36% and 46% of its inventory from this supplier
in Fiscal 1999 and Fiscal 1998, respectively. Management believes that other
suppliers could provide similar products on comparable terms. However, a change
in an individual supplier could delay shipment of product resulting in a loss of
sales which could affect operating results.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the assets.
Expenditures for repairs and maintenance are charged to expense as incurred.
DEFERRED OFFERING AND DEFERRED DEBT COSTS
Deferred offering costs represented amounts incurred in connection with
obtaining equity in the Company's 1997 Private Placement (see Note 14). Such
costs were charged against paid-in capital when the respective sales of the
units were closed.
Deferred debt costs were incurred in connection with obtaining debt
financing, either in the Company's 1997 Private Placement (see Note 14) or for
the Company's bank credit facility (see Note 8.). The costs are amortized over
the term of the debt issued. Amortization amounted to $62,204 and $107,192 for
the years ended September 30, 1999 and 1998, respectively.
ADVERTISING COSTS
Advertising costs are charged to operations when incurred. Advertising costs
amounted to $49,680 and $235,957 for the years ended September 30, 1999 and
1998, 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.
F-10
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company utilized SFAS No. 109, "Accounting for Income Taxes," which
requires the use of the liability method of accounting for income taxes. The
liability method measures deferred income taxes by applying statutory rates in
effect at the balance sheet date to the differences between the tax base of
assets and liabilities and their reported amounts in the financial statements.
The resulting deferred tax assets or liabilities are adjusted to reflect changes
in tax laws as they occur.
EARNINGS PER SHARE
The Company adopted SFAS No. 128, "Earnings Per Share" which establishes new
standards for computing and presenting earnings per share. This statement also
requires the restatement of all prior period earnings per share data presented.
Earnings per share are based on the weighted average number of shares
outstanding during each year presented. Common stock equivalents have not been
included in 1998 as their effect would be antidilutive.
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--RESTRUCTURING CHARGE IN FISCAL 1998
During Fiscal 1998, the Company commenced a plan to streamline its
operations and improve the Company's cost structure. In August 1998, the Company
entered into an agreement to sell certain production equipment of a wholly-owned
subsidiary, Koszegi Industries, Inc. ("Koszegi") to MedCovers, Inc. of Raleigh,
North Carolina, and to establish alternate sources of domestic production in
order close its production facility, which had been operating at substantially
less than capacity. The majority of Koszegi's orders are now produced overseas.
Accordingly, the Company did not renew the lease for its production facility in
South Bend, Indiana, upon its expiration in February 1999.
In the fourth quarter of Fiscal 1998, the Company recorded a restructuring
charge of approximately $897,000 ($.19 per basic share) in connection with the
closing of its production facility. The primary components of that charge were
severance and employee benefit costs for the elimination of manufacturing and
administrative support positions $360,000, the impairment of leasehold
improvements to a leased building, $131,000, and office equipment of $71,000,
factory related expenses incurred during the shutdown $285,000 and other costs
$50,000. The building improvements were discarded upon termination of the lease
and the office equipment was held for use, until disposed, in June, 1999. The
Company used appraisals, which were prepared by third party valuation experts,
to determine the realizable value for assets that were marked down to fair
market value. Subsequent sales of such assets were based on this appraisal.
Factory related expenses included property tax payments subsequent to the
shutdown, and repairs to the building, which had no future economic value and
were
F-11
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
NOTE 2--RESTRUCTURING CHARGE IN FISCAL 1998 (CONTINUED)
properly accrued. The total number of employees that were terminated as a result
of the shutdown in February 1998 were sixty-two. All employees had been notified
months prior to the impending shutdown and the accrual of their severance and
benefits. At September 30,1999, all of the charges have been expended, except
one item, which the Company believes will not exceed $100,000. Such amount is
fully reserved.
NOTE 3--INVENTORIES
Inventories at September 30, 1999 are comprised of the following:
<TABLE>
<S> <C>
Finished goods.............................................. $957,402
Raw materials and supplies.................................. 34,662
--------
$992,064
========
</TABLE>
NOTE 4--NOTES RECEIVABLE
Notes receivable consist of the following at September 30, 1999:
<TABLE>
<S> <C>
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 note is secured by the assets
sold by the Company, and a personal guarantee of
$200,000.................................................. $277,355
Subordinated note received as part of the sale of certain
assets of its Republic division in April 1994; originally
payable in monthly installments of $5,833 plus interest at
the prime rate (not to exceed 9%) through May 2000.
Revised in January 1999 to 12 monthly installments of
$2,917 commencing in April 1999, with a balloon payment of
$59,288 in May 2000....................................... 76,787
354,142
Less: current maturities 227,858
--------
$126,284
========
</TABLE>
Maturities of notes receivable are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
SEPTEMBER 30, AMOUNT
------------------ --------
<S> <C>
2000........................................................ $227,858
2001........................................................ 126,284
--------
$354,142
========
</TABLE>
F-12
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
NOTE 4--NOTES RECEIVABLE (CONTINUED)
Interest income on the above notes receivable amounted to $57,051 and $105,211
for the years ended September 30, 1999 and 1998, respectively.
NOTE 5--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at September 30, 1999 consists of the
following:
<TABLE>
<CAPTION>
ESTIMATED USEFUL LIVES
----------------------
<S> <C> <C>
Land........................................................ $ 25,000
Building and building improvements.......................... 215,341 10--20 years
Furniture, fixtures, and computer equipment................. 290,919 5--10 years
Leasehold improvements...................................... 64,988 *
Transportation equipment.................................... 63,067 3 years
--------
659,315
Less: Accumulated depreciation and amortization............. 166,888
--------
$492,427
========
</TABLE>
------------------------
* Leasehold improvements are amortized on the straight-line method over the
terms of the leases or the estimated lives of the improvements, if shorter.
Depreciation expense amounted to $70,362 and 140,541 for the years ended
September 30, 1999 and 1998, respectively.
NOTE 6--NOTES AND LOANS RECEIVABLE--OFFICERS
At September 30, 1999 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 in amounts of $10,000 per year, paid by the
end of each fiscal year from September 1996 through
September 2000 plus interest at 7% per annum.............. $10,000
Note receivable in amounts of $18,490 per year, paid by the
end of each fiscal year from September 1999 until such
balance is paid plus interest at 6% per annum............. 73,961
-------
83,961
Less: Current maturities.................................... 28,490
-------
$55,471
=======
</TABLE>
F-13
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
NOTE 6--NOTES AND LOANS RECEIVABLE--OFFICERS (CONTINUED)
Maturities of notes and loans receivable--officers are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING SEPTEMBER 30,
--------------------------------
<S> <C>
2000........................................................ $28,490
2001........................................................ 18,490
2002........................................................ 18,490
2003........................................................ 18,491
-------
$83,961
=======
</TABLE>
Interest income on the above notes and loans amounted to $6,597 and $10,433
for the years ended September 30, 1999 and 1998, respectively.
NOTE 7--PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets at September 30, 1999 consist of
the following:
<TABLE>
<S> <C>
Non-trade receivables....................................... $298,800
Prepaid insurance........................................... 116,832
Sundry others............................................... 25,370
--------
$441,002
========
</TABLE>
NOTE 8--DEBT
BORROWINGS UNDER CREDIT LINE--BANK
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 under this credit line is
determined by a formula of accounts receivable and inventory. The interest rate
on the borrowings is prime plus three quarters of one percent. The line is
scheduled to mature on March 31, 2001. At September 30, 1999 the Company was
liable for acceptances totaling $995,852. In April 1998, the Company paid its
prior bank approximately $937,000, which represented all amounts owed under its
former credit facility. In addition, at September 30, 1999 the Company was
contingently liable under the letters of credit in the amount of $2,434,360.
Prior to the establishment of the current line of credit, the Company
periodically borrowed on letters of credit from a corporation controlled by a
relative of certain principal stockholders. At September 30, 1999, no amount was
owed.
Interest expense on the bank debt amounted to $61,068 and $94,588 for the
years ended September 30, 1999 and 1998, respectively. Interest to the
controlled corporation amounted to $-0- and $14,529 for the years ended
September 30, 1999 and 1998, respectively.
On December 4, 1998, the Company converted promissory notes, which were
issued in connection with the Company's 1997 Private Placement into common stock
(Note 14). Interest expense on that debt amounted to $10,666 and $51,967 for the
years ended September 30, 1999 and 1998, respectively.
F-14
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
NOTE 9--MORTGAGE PAYABLE
The Company owned a building in Brooklyn, New York which was sold in
December 1997. The proceeds of $830,000 and working capital were used to repay
the balance of the mortgage. The Company recognized a profit of approximately
$669,000 on the sale. Interest expense on the mortgage amounted to $31,493, for
fiscal ended September 30, 1998.
Depreciation on the building, which is included in rental income, amounted
to $4,130 for fiscal year ended September 30, 1998.
NOTE 10--ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities at September 30, 1999 consist
of the following:
<TABLE>
<S> <C>
Accrued expenses related to restructuring................... $ 152,334
Accrued expenses to vendors and others...................... 526,717
Accrued vacation............................................ 64,107
Accrued bonuses............................................. 495,308
Income taxes payable........................................ 60,000
----------
$1,298,466
==========
</TABLE>
NOTE 11--INCOME TAXES
The components of the deferred tax assets and liabilities at September 30,
1999 are as follows:
<TABLE>
<S> <C>
Current:
Accounts receivable....................................... $ 45,492
Inventory................................................. 197,380
Accrued expenses.......................................... 259,760
Valuation allowance....................................... --
----------
502,632
----------
Non-current:
Net operating losses...................................... 1,260,357
Property, plant and equipment............................. 24,438
Contribution carryover.................................... 13,600
Valuation allowance....................................... (387,000)
----------
911,395
----------
Net deferred tax asset...................................... $1,414,567
==========
</TABLE>
At September 30, 1999 a valuation allowance is provided as it is uncertain
if certain deferred tax assets will be fully utilized.
F-15
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
NOTE 11--INCOME TAXES (CONTINUED)
Provision (credit) for income taxes for the years ended September 30,
consists of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Current tax expense..................................... $ 60,000 $ 18,700
Deferred tax expense.................................... 528,000 (218,164)
Change in valuation allowance........................... (193,000) 479,612
-------- --------
395,000 280,148
</TABLE>
Reconciliation of statutory rate to effective income tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
----------------------
1999 1998
---- ----
<S> <C> <C>
Continuing operations:
At federal statutory rate.............................. 34.0% 34.0%
Effect of:
Temporary and permanent differences.................. (5.2) (65.7)
Net operating loss carryforwards..................... (28.9) 31.7
Deferred income taxes................................ 22.2 32.7
Miscellaneous........................................ 4.1 2.4
----- -----
26.2% 35.1%
===== =====
</TABLE>
At September 30, 1999, the Company has unused net operating loss
carryforwards of approximately $3,448,000 expiring through September 30, 2011.
NOTE 12--COMMITMENTS
The Company rents certain of its facilities under leases expiring at various
dates through July 2001. In addition, the Company is leasing four warehouse
facilities on a month-to-month basis. Total rent expense for the years ended
September 30, 1999 and 1998 amounted to $221,465 and $407,814, respectively.
Minimum rental commitments under such leases for future fiscal years are
summarized below:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------
<S> <C>
2000........................................................ $186,128
2001........................................................ 63,528
2002........................................................ 47,646
--------
$297,302
========
</TABLE>
EMPLOYMENT CONTRACTS
Effective October 1, 1997, the Company entered into an employment agreement
with its chief executive officer through September 30, 2000. The agreement
provided for an annual salary of $275,000 plus annual bonus compensation
generally equal to 5% of net pre-tax annual income of the Company in excess of
$1,000,000. Effective December 11, 1998, this employment agreement was
terminated and
F-16
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
NOTE 12--COMMITMENTS (CONTINUED)
the Company entered into a consulting agreement with the officer, with payments
under the new agreement beginning January 1 1999. Pursuant to this agreement,
the officer receives an annual consulting fee of $200,000 for a period of five
years, ending December 10, 2003. The officer 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 is payable on the fifteen months anniversary,
January 1, 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 an officer pursuant to which the officer is employed as chief executive
officer and vice chairman, and six months thereafter, as chairman, through
September 30, 2000. The agreement provides for an annual salary of $201,600 plus
an annual bonus equal to ten percent (10%) of the pre-tax operating profit
(before the impact of other bonuses) in excess of $675,000. During Fiscal 1999
the Company made a prepayment of $20,000 and accrued $140,000 for this bonus. In
addition, the officer 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.
Effective November 1, 1997, the Company entered into an employment agreement
with its executive vice president through October 31, 2000 at an annual salary
of $150,000, plus annual bonus compensation generally equal to 7.5% of net
annual pre-tax income of the Company in excess of $1,000,000. In April 1998, the
officer was elected president (see below). Effective October 1, 1998, the
Company and this executive agreed to a new contract which contained the
following provisions; annual salary of $230,000, bonus equal to 3 percent of
sales above $13,000,000, and additional stock options vested based on sales
performance levels during the term of the agreement. Such options 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 pice 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).
Effective October 14, 1996, the Company entered into a two-year agreement
contract with its former president. The officer received an annual base salary
of $150,000, a signing bonus of $30,000 and an annual bonus based on the
Company's pre-tax income. The officer also received an option to purchase
150,000 shares of common stock vesting in four equal semi-annual installments
commencing October 14, 1996 provided that officer continues to be employed by
the Company. The officer resigned in April 1998. At the time of his resignation,
the officer held vested and exercisable options for the purchase of 75,000
shares of common stock, all of which have since been exercised.
Amounts incurred under employment and severance agreements amounted to
$1,275,767 and $525,779 for the years ended September 30, 1999 and 1998,
respectively (including accrued bonus obligations).
F-17
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
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 and $8,000 for the years
ended September 30, 1999 and 1998, respectively.
OTHER
For the years ended September 30, 1999 and 1998, the Company incurred
consulting fees totaling $71,500 and $40,000 respectively to a corporation which
is controlled by a principal stockholder of the Company.
NOTE 14--STOCKHOLDERS' EQUITY
COMMON AND PREFERRED STOCK
On January 13, 1997, the Company increased the number of authorized shares
from fourteen million (14,000,000) to forty-four million (44,000,000), of which
four million have been designated as preferred stock.
On January 13, 1997, the Board of Directors declared a one-for-two reverse
stock split which became effective as of December 23, 1997. All share data and
per share amounts have been adjusted to reflect the reverse stock split on a
retroactive basis.
PRIVATE PLACEMENT
Between May and December 1997, the Company sold through a Private Placement,
55.4 units at a price of $25,000 per unit. Each unit consisted of the following:
1. 30,000 shares of common stock.
2. A warrant to purchase up to 30,000 shares of common stock at $4.00 per
share through March 15, 1999.
3. An unsecured 10% convertible promissory note in the amount of $10,000
payable on December 4, 1998. The notes are convertible, at the sole
option of the Company, into 20,000 shares of common stock and one warrant
(same terms as described in #2). If the Company 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
F-18
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
NOTE 14--STOCKHOLDERS' EQUITY (CONTINUED)
recognized ($333,400). No tax benefit was recorded in connection with this
interest charge as it is not deductible for federal income taxes..
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, 1999, follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISE EXPIRATION
ISSUE WARRANTS 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
=======
</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, 1999
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 1999 and 1998.
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 the year
ended September 30, 1998, a former officer of the Company exercised 75,000
options providing proceeds to the Company of $121,500.
A summary of stock option activity follows for the respective fiscal years:
<TABLE>
<CAPTION>
1999 1998
------------------------------- -------------------------------
EXERCISE EXERCISE
SHARES PRICES SHARES PRICES
--------- ------------------- --------- -------------------
<S> <C> <C> <C> <C>
Balance Beginning of Year.......... 1,051,875 $ 1.10--$3.00 1,173,125 $ 1.01--$2.00
Granted............................ 835,000 $ 1.75--$3.25 28,750 $ 2.00--$3.00
Exercised.......................... -- (75,000) $ 1.62
Canceled........................... -- (75,000) $ 1.62
--------- ---------
Balance End of Year................ 1,886,875 $ 1.10--$3.25 1,051,875 $ 1.10--$3.00
========= =========
</TABLE>
Of the total outstanding options at September 30, 1999, 300,000 options
expire in Fiscal 2000, 723,125 in Fiscal 2007 and 28,750 in Fiscal 2008 and
835,000 in Fiscal 2009.
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 $25,354 and $24,866 for the years ended
September 30, 1999 and 1998, respectively.
NOTE 16--FAIR VALUE OF FINANCIAL INSTRUMENTS
The amounts at which cash and cash equivalents, accounts receivable,
long-term debt, accounts payable and accrued expenses and other current
liabilities are presented in the balance sheet approximate their fair value due
to their short maturities.
F-20
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
NOTE 16--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following table presents the carrying amounts and fair values at
September 30, for the following:
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Notes Receivable.................. $354,142 $358,150 $696,598 $687,257
Notes and Loans
Receivable--officers............ 83,961 66,429 116,273 90,658
</TABLE>
The fair values of the above items have been determined based on discounted
cash flow using a market rate of interest at the balance sheet date as
applicable to comparable items.
NOTE 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, 1999
and 1998. If the Company had elected to recognize expense in the year ended
September 30, 1999 and 1998for 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>
1999 1998
----------------------- -------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss)............. $846,865 $447,458 $(1,328,676) $(1,340,869)
Income (loss) per share....... $ .14 $ .08 $ (.29) $ (.29)
</TABLE>
The fair value of the stock options used to compute pro forma net loss and
loss per share disclosures is the estimated present value at grant date using
the Black-Scholes option-pricing model with the following weighted average
assumptions: expected volatility of 38% (1997-25%); risk-free interest rate of
6.0% (1998-4.3%); and an expected holding period of five years.
F-21
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
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 operates in geographic regions that include the United States and
Europe. Other geographic sales include Australia and Asia. Prior to 1999 the
Company did organize its business geographically and, as such, no prior year
information is available. Segments are defined based primarily on the location
of the customer. Segment information is as follows:
<TABLE>
<CAPTION>
1999
--------
<S> <C>
Sales:
United States............................................. $ 5,827
Europe.................................................... 13,958
Other foreign countries................................... 768
-------
Total sales............................................. $20,553
=======
Operating income (loss):
United States............................................. $ 72
Europe.................................................... 4,483
Other foreign countries................................... (101)
Corporate--unallocated.................................... (2,800)
-------
Total operating income.................................. $ 1,654
=======
</TABLE>
ALLOCATION OF EXPENSES:
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>
1999
--------
<S> <C>
United States............................................... $1,366
Europe...................................................... 4,583
Other foreign countries..................................... 273
Unallocated Corporate....................................... 3,647
------
Total Assets.............................................. $9,869
======
</TABLE>
F-22
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
NOTE 19--YEAR 2000 COMPLIANCE
The Company addressed the issue of software applications which were unable
to recognize "OO" in their program code. The Company evaluated its alternatives
and elected to acquire a new data system, rather than upgrade its existing
systems and applications. During Fiscal 1999, the Company expended approximately
$150,000 to install new hardware and software. Internal staff costs associated
with training were expensed as incurred, while cost of the new system is being
capitalized and amortized over its useful life. The Company believes that its
data and other systems are Year 2000 compliant.
NOTE 20--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 the 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
includes the recognition of a beneficial conversion feature of $220,592 and an
additional debt discount of $333,408, 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 debt
discount on the notes $333,408.
The recognition of the additional debt discount and the beneficial
conversion feature had the following effects on net income (loss):
<TABLE>
<CAPTION>
PER SHARE DATA
-----------------------------------------
NET INCOME (LOSS) BASIC DILUTED
YEARS ENDED ------------------------- ------------------- -------------------
SEPTEMBER 30, AS REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
--------------------- ----------- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
1998......... ($1,078,776) ($1,328,676) ($.23) ($.29) ($.23) ($.29)
1999*........ $ 835,777 $ 846,865 $ .14 $ .14 $ .14 $ .14
</TABLE>
------------------------
* The 1999 figures originally reported a $277,000 extraordinary item
associated with the conversion of the notes into common shares. As a result
of the restatement, that amount was reversed and a beneficial conversion
expense of $220,592 and a debt discount of $45,320 was recorded as ordinary
interest expense.
The cumulative effect of the restatement resulted in an increase of $38,188
to accumulated deficit at October 1, 1997. 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, 1997....................... $ 50,000 $41,333 $ -- $ 91,333
Year ended September 30, 1998....................... $ 91,333 $19,467 $ -- $110,800
Year ended September 30, 1999....................... $110,800 $23,000 $ -- $133,800
</TABLE>
F-24
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 11--COMPUTATION OF INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------
1999 1998
---------- -----------
<S> <C> <C> <C>
NUMERATOR:
Income (loss) from continuing operations:
Income (loss) from discontinued operations.......... $ 846,865 $(1,328,676)
Preferred dividends................................. -- --
---------- -----------
846,865 BASIC (1,328,676)
Impact of potential common shares:
Convertible debt.................................... -- N/A
---------- -----------
$ 846,865 DILUTED $(1,328,876)
========== ===========
DENOMINATOR:
Weighted average number of common shares outstanding--
see schedule........................................ 5,751,266 BASIC 4,650,641
Impact of potential common shares:
Stock options and warrants.......................... 70,288 N/A
---------- -----------
5,821,554 DILUTED 4,650,641
========== ===========
BASIC EPS:
Net Income per share.................................. $ .14 $ (.29)
========== ===========
DILUTED EPS:
Net Income per share.................................. $ .14 $ (.29)
========== ===========
</TABLE>
------------------------
NOTE-- For the year ended September 30, 1998, common stock equivalents have not
been included as their effect would be antidilutive. Common stock
equivalents include stock options and warrants and convertible debt.
F-25
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 11--COMPUTATION OF INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------
1999 1998
-------- ----------
<S> <C> <C>
CALCULATIONS
1. STOCK OPTIONS
TREASURY STOCK METHOD APPLIED TO STOCK OPTIONS:
Sale of common stock:
Total options and warrants outstanding................ 450,000 1,121,250
Average price......................................... $ 1.10 $ 1.87
-------- ----------
Total................................................... $495,000 $2,091,719
======== ==========
Repurchase of common stock:
Proceeds.............................................. $495,000 $2,091,719
Average stock price................................... $ 1.30 $ 2.48
-------- ----------
Shares repurchased...................................... 379,712 845,058
======== ==========
Net increase in shares:
Shares sold........................................... 450,000 1,121,250
Shares repurchased...................................... 379,712 845,058
-------- ----------
Increase in shares...................................... 70,288 276,192
======== ==========
2. CONVERTIBLE DEBT
TERMS:
Interest rate........................................... -- 10%
Par..................................................... -- 10,000
Convertible into shares................................. -- 20,000
Conversion price........................................ -- N/A
# of units.............................................. -- 55.4
Total debt.............................................. -- $ 554,000
If converted method applied to convertible debt
Numerator increase--interest savings assuming a 40% tax
rate...................................................... $ -- $ 33,240
======== ==========
Denominator increase--assuming conversion................... -- 1,108,000
======== ==========
</TABLE>
F-26
<PAGE>
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 11--COMPUTATION OF INCOME PER COMMON SHARE
COMPUTATION OF WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 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 through 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)
---------
September............................................... 6,101,641 1/12 508,470
---------
WEIGHTED AVERAGE SHARES................................. 5,751,266
=========
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1998
--------------------------------------------
SHARES FRACTION OF WEIGHTED AVERAGE
DATES OUTSTANDING OUTSTANDING PERIOD SHARES
----------------- ----------- ----------- ----------------
<S> <C> <C> <C>
October through November................................ 4,138,141 2/12 689,690
Common stock issued in connection with private placement
in December........................................... 585,000
---------
December through May.................................... 4,723,141 6/12 2,361,571
Exercise of stock options into common stock in June..... 75,000
---------
June through September.................................. 4,798,141 4/12 1,599,380
---------
WEIGHTED AVERAGE SHARES................................. 4,650,641
=========
</TABLE>
F-27
