10QSB 1 a10qsb.txt 10QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended June 30, 2000. Or [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ____ to ____ Commission file number 0-6669 FORWARD INDUSTRIES, INC. (Exact name of registrant as specified in its charter) New York 13-1950672 --------------------------------------- ------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 400 Post Avenue, Westbury, NY 11590 --------------------------------------- ------------------------------------- (Address of principal executive offices) (Zip Code) (516) 338-0700 --------------------------------------------------- (Issuer's Telephone Number, including Area Code) --------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. As of August 11, 2000, 6,084,141 Shares of the issuer's Common Stock were outstanding. Transitional Small Business Disclosure Format: Yes [ ] No [X] FORWARD INDUSTRIES, INC. AND SUBSIDIARIES FORM 10-QSB NINE MONTHS ENDED JUNE 30, 2000 CONTENTS PAGE ---- PART I. FINANCIAL INFORMATION ............................................ 3 Item 1. Financial Statements ............................................. 3 Consolidated Balance Sheets as of June 30, 2000 (Unaudited) and September 30, 1999 .................................... 3 Consolidated Statements of Income (Unaudited) for the Three and Nine Months ended June 30, 2000 and 1999 .............................. 5 Consolidated Statements of Comprehensive Income (Unaudited) for the Nine Months ended June 30, 2000 and 1999 .......... 6 Consolidated Statements of Cash Flows (Unaudited) for the Nine Months ended June 30, 2000 and 1999 .............................. 7 Notes to Form 10-QSB (Unaudited) ................................... 9 Item 2. Management's Discussion and Analysis ............................. 17 PART II. OTHER INFORMATION ............................................... 21 Item 1. Legal Proceedings ................................................ 21 Item 2. Changes in Securities ............................................ 21 Item 3. Defaults upon Senior Securities .................................. 21 Item 4. Submission of Matters to a Vote of Security Holders .............. 21 Item 5. Other Information ................................................ 21 Item 6. Exhibits and Reports on Form 8-K ................................. 21 2 PART I. ITEM 1. FINANCIAL STATEMENTS FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, September 30, 2000 1999 -------- ------------ (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents ............................. $ 766,837 $1,210,762 Accounts receivable, less allowance for doubtful accounts of $66,800 and $133,800 ................. 3,764,826 4,738,263 Inventories - net ..................................... 810,747 992,064 Notes and loans receivable - current portion .......... 152,523 227,858 Notes and loans receivable - officers - current portion 398,157 28,490 Prepaid expenses and other current assets ........... 358,330 441,002 Deferred income taxes ................................. 502,632 502,632 ---------- ---------- Total current assets .............................. 6,754,052 8,141,071 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT - net ........................ 574,644 492,427 ---------- ---------- ASSETS HELD FOR SALE ....................................... 180,356 -- ---------- ---------- OTHER ASSETS: Deferrred income taxes ................................ 709,750 911,395 Note receivable - net of current portion .............. -- 126,284 Notes and loans receivable - officers - net of current portion ................................... 114,538 55,471 Deferred debt costs ................................... 5,344 25,769 Other assets .......................................... 98,593 73,764 ---------- ---------- 928,225 1,192,683 ---------- ---------- $8,437,277 $9,826,181 ========== ========== The accompanying notes are an integral part of the consolidated financial statements.
3 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, September 30, LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999 ------------------------------------ ---- ---- (Unaudited) CURRENT LIABILITIES: Borrowings under credit line .............................. $ 809,995 $ 995,852 Accounts payable .......................................... 1,124,963 2,301,557 Accrued expenses and other current liabilities ............ 761,980 1,298,466 Accrued severance to officer .............................. -- 115,000 ----------- ----------- Total current liabilities ....................... 2,696,938 4,710,875 ----------- ----------- OBLIGATION UNDER CAPITAL LEASES ................................ 117,709 -- ----------- ----------- Total Liabilites ................................. 2,814,647 4,710,875 ----------- ----------- COMMITMENTS STOCKHOLDER'S EQUITY: Preferred stock, 4,000,000 authorized shares par value $.01; none issued .......................... -- -- Common stock, 40,000,000 authorized shares, par value $.01; issued 6,286,531 shares and 6,286,531 shares (including 202,390 and 194,890 held in treasury) . 62,865 62,865 Paid-in capital ........................................... 7,402,768 7,402,768 Accumulated deficit ....................................... (1,496,102) (2,048,569) Comprehensive income adjustment ........................... 8,800 (589) ----------- ----------- 5,978,331 5,416,475 Less: Cost of shares in treasury ......................... 355,701 301,169 ----------- ----------- Total stockholders' equity ....................... 5,622,630 5,115,306 ----------- ----------- $ 8,437,277 $ 9,826,181 =========== =========== The accompanying notes are an integral part of the consolidated financial statements.
4 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended June 30, June 30, --------------------- --------------------- 2000 1999 2000 1999 ---- ---- ---- ---- NET SALES ..................................... $ 3,473,020 $ 3,821,585 $ 12,513,671 $ 11,420,320 COST OF GOODS SOLD ............................ 2,425,829 2,700,169 8,382,816 8,102,089 ------------ ------------ ------------ ----------- GROSS PROFIT .................................. 1,047,191 1,121,416 4,130,855 3,318,231 ------------ ------------ ------------ ----------- OPERATING EXPENSES: Selling ................................. 609,349 408,281 1,549,951 1,160,536 General and administration .............. 328,872 558,549 1,635,094 1,864,337 Relocation Costs ........................ 187,022 -- 187,022 -- ------------ ------------ ------------ ----------- 1,125,243 966,830 3,372,067 3,024,873 ------------ ------------ ------------ ----------- INCOME FROM OPERATIONS ........................ (78,052) 154,586 758,788 293,358 ------------ ------------ ------------ ----------- OTHER INCOME (DEDUCTIONS): Interest expense ........................ (31,606) (25,398) (95,471) (95,920) Interest expense - related parties ...... -- (196) -- (1709) Interest income ......................... 26,203 16,638 73,352 57,271 Other income - net ...................... 24,456 (25,370) 17,442 56,767 ------------ ------------ ------------ ----------- 19,053 (34,326) (4,677) 16,409 ------------ ------------ ------------ ----------- INCOME BEFORE PROVISION FOR INCOME TAXES ........................ (58,999) 120,260 754,111 309,767 PROVISION FOR INCOME TAXES .................... (23,603) 48,104 201,644 123,907 ------------ ------------ ------------ ----------- INCOME BEFORE EXTRAORDINARY ITEM .............. (35,399) 72,156 552,467 185,860 ------------ ------------ ------------ ----------- EXTRAORDINARY ITEM: Non-cash interest charge upon conversion of promissory notes (net of income tax benefit of $ -0-) (Note 4) ..... -- -- -- (277,000) ------------ ------------ ------------ ----------- NET INCOME .................................... $ (35,399) $ 72,156 $ 552,467 $ (91,140) ============ ============ ============ ============ NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE: Basic: Income before extraordinary item $ (0.01) $ 0.01 $ 0.09 $ 0.03 Extraordinary item ............. -- -- -- (0.05) ------------ ------------ ------------ ------------ $ (0.01) $ 0.01 $ 0.09 $ (0.02) ============ ============ ============ ============ Diluted: Income before extraordinary item $ (0.01) $ 0.01 $ 0.07 $ 0.03 Extraordinary Item ............. -- -- -- (0.05) ------------ ------------ ------------ ------------ $ (0.01) $ 0.01 $ 0.07 $ (0.02) ============ ============ ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES ............................. 6,084,141 5,931,474 6,089,974 5,670,808 ============ ============ ============ ============ DIVIDENDS ..................................... NONE NONE NONE NONE
5 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Nine Months Ended June 30, --------------------- 2000 1999 ---- ---- NET INCOME (LOSS) ................. $ 552,467 $(91,140) COMPREHENSIVE INCOME ADJUSTMENTS: Foreign currency translation 9,389 20,772 ---------- -------- COMPREHENSIVE INCOME (LOSS) ....... $ 561,856 $(70,368) ========== ======== The accompanying notes are an integral part of the consolidated financial statements 6 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended June 30, ----------------------- 2000 1999 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (Loss) ........................................ $ 552,467 $ (91,140) Adjustments to reconcile net income (loss) to net cash provided by (used in) continuing operations: Extraordinary interest charge ................... -- 277,000 Gain on sale of property and equipment .......... -- (73,769) Depreciation and amortization ................... 75,557 38,491 Amortization of deferred debt costs ............. 29,586 36,434 Deferred taxes .................................. 201,645 123,907 Changes in assets and liabilities: Accounts receivable .......................... 973,437 558,784 Inventories .................................. 181,317 (155,737) Prepaid expenses and other current assets .... 82,672 87,221 Other assets ................................. (24,829) (14,060) Accounts payable ............................. (1,176,594) 43,736 Accrued expenses and other current liabilities (536,486) (628,992) Accrued severance to officer ................. (115,000) (200,000) ----------- --------- NET CASH (USED IN) PROVIDED BY OPERATIONS ..................... 243,772 1,875 ----------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Net proceeds from sale of property and equipment ......... -- 37,215 Proceeds from notes and loans receivable ................. 201,619 258,141 (Advances to) Proceeds from officers ..................... (428,734) 9,241 Purchases of property, plant and equipment ............... (220,421) (320,225) ----------- --------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES ..................................... (447,536) (15,628) ----------- --------- The accompanying notes are an integral part of the consolidated financial statements.
7 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED)
Nine Months Ended June 30, -------------------------- 2000 1999 ---- ---- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from (repayment of) short-term borrowings $ (185,857) ($334,915) Payments of notes payable - related parties ...... -- (42,670) Proceeds from issuances of stock ................. -- 16,000 Deferred offering costs .......................... -- (11,950) Purchases of treasury stock ...................... (54,532) -- Deferred debt costs .............................. (9,161) (2,811) ----------- --------- NET CASH PROVIDED BY(USED IN) FINANCING ACTIVITIES .... (249,550) (376,346) ----------- --------- EFFECT OF EXCHANGE RATE CHANGES ....................... 9,389 20,772 ----------- --------- NET CHANGE IN CASH AND CASH EQUIVALENTS ............... (443,925) (369,327) CASH AND CASH EQUIVALENTS - beginning ................. 1,210,762 703,920 ----------- --------- CASH AND CASH EQUIVALENTS - ending .................... $ 766,837 $ 334,593 =========== ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest .................................. $ 61,380 $ 51,657 Income taxes .............................. $ 32,268 $ 1,981 SCHEDULE OF NON-CASH ACTIVITES: Furniture and Equipment acquired under capital lease obligations ...................... $ 117,709 -- Property transferred to Assets held for sale . $ 180,356 -- Issuance of common stock upon conversion of long-term debt ......................... -- $ 554,000 Sale of property and equipment held for sale . -- $ 190,554 The accompanying notes are an integral part of the consolidated financial statements.
8 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FORM 10-QSB NINE MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) 1. BASIS OF PRESENTATION The information in this Form 10-QSB includes the results of operations of Forward Industries, Inc. ("the Company") and its wholly-owned subsidiary, Koszegi Industries, Inc. ("Koszegi"), for the three and nine month periods ended June 30, 2000 and 1999. The data is unaudited, but includes all adjustments including the elimination of intercompany accounts and transactions which are, in the opinion of management, necessary for a fair presentation of the interim periods presented. The accounting policies utilized in the preparation of this Form 10-QSB are the same as those set forth in the Company's annual Form 10-KSB for the fiscal year ended September 30, 1999 and should be read in conjunction with the disclosures presented therein. Certain prior period balances have been reclassified to conform to the current period classification. This Quarterly Report may contain forward-looking statements which involve certain risks and uncertainties. Important factors could arise, including those identified in "Risk Factors" in the Company's form 10-KSB for the year ended September 30, 1999, which could cause the Company's operating results to differ materially from those contained in any forward looking statement. 2. EARNINGS PER SHARE Earnings per share are based on the weighted average number of shares outstanding during each period presented. The Company has adopted FAS 128, "Earnings Per Share." 3. BORROWINGS UNDER CREDIT LINE In January 2000, the Company established a credit facility with a new bank which provides for a maximum line of credit of $5.0 million, including letters of credit. The line, which is renewable annually at the discretion of the bank, expires March 31, 2001. There is no formula which limit the borrowings or restrictive covenants, as in the prior credit facility. However, the Company is required to eliminate borrowings for thirty (30) consecutive days and is required to maintain operating performance which is acceptable to the bank. The credit facility bears interest at the prime rate in effect from time-to-time plus three quarters of one percent. At June 30, 2000, $810,000 was outstanding in direct borrowings; there were no outstanding obligations under letters of credit. In July, 2000 the Company repaid all outstanding amounts from internally generated funds. The Company provided the assets of the consolidated Company as collateral for the line. On February 1, 2000 the direct borrowings and acceptances from the former credit facility were repaid from funds received under the new agreement. 4. ISSUANCE OF COMMON STOCK FOR PROMISSORY NOTES IN DECEMBER 1998 In December 1997, the Company consummated a private offering of securities consisting of units ("Units"), each Unit comprised of (i) 30,000 shares of Common Stock, (ii) one warrant (a "Private Placement Warrant") to purchase up to 30,000 shares of Common Stock at $4.00 per share and (iii) one unsecured convertible promissory note (a "Note") in the principal amount of $10,000, bearing interest at a rate of 10% per annum (convertible at the sole option of the Company under certain circumstances, into 20,000 shares of Common Stock and one Private Placement Warrant) maturing on December 4, 1998. A total of 55.4 Units were sold for $25,000 per unit, aggregating gross proceeds of $1,385,000. Included in the Units sold was $554,000 aggregate principal amount of convertible promissory notes. On December 4, 1998, the Company exercised its option to convert all of such Notes into a total of 1,108,000 shares of Common Stock and Private Placement Warrants to 9 purchase 1,662,000 shares of Common Stock (such warrants expired on March 15, 1999 and are no longer outstanding). Interest, which had accrued on such Notes of approximately $72,000, was paid on that date. In connection with the conversion of its Notes into Common Stock, the Company recorded a non-cash, extraordinary charge against earnings of $277,000; such amount is included in the consolidated statements of income for the nine month period ended June 30, 1999. This amount, recorded as interest expense, reflects the difference between the average bid and asked price per share of the Company's stock on December 4, 1998 (the date on which such conversion occurred) on the Nasdaq SmallCap Market, $.75, and, the price at which the Company converted such shares, $.50, aggregated by the total shares issued. No tax benefit was recorded in connection with this interest charge as it is not deductible for federal income taxes. 5. INVENTORY Inventory consists of the following: June 30, September 30, 2000 1999 ---- ---- (Unaudited) Raw materials..... $ 1,675 $ 34,662 Finished goods ... 809,072 957,402 -------- -------- $810,747 $992,064 ======== ======== 6. NOTES AND LOANS RECEIVABLE FROM OFFICERS A ninety (90) day, unsecured, promissory note in the amount of $40,000, which had been provided to the Company's chief executive officer for personal needs, was repaid on June 29, 2000, plus accrued interest in the amount of $2,000. The note was originally issued on December 16,1999 with interest at the prime-rate in effect from time-to-time plus three quarters of one percent. On April 24, 2000 the Company provided a ninety (90) day, loan to its president, in the amount of $370,000 at the prime rate in effect from time-to-time plus three quarters of one percent. The purpose of the loan was to finance property that was being acquired by this individual in connection with the Company's relocation to Florida. The Company has been assigned the right to file a mortgage and lien on the property in the event the note is not repaid, as well as a pledge of 350,000 common shares of the Forward Industry stock owned by this individual, as additional security. In August, 2000 approximately $60,000 of this note was repaid. The Company extended the remaining loan sixty (60) days, through September 22, 2000. 7. ASSETS HELD FOR SALE In connection with the Company's relocation to Pompano Beach Florida, and the related consolidation of its offices in New York and South Bend, Indiana, land and a building owned by the Company in South Bend, became available for sale. Current market comparisons indicate that the fair market value is equal to, or greater than, the net book value of the assets; accordingly, the assets are presented in the accompanying balance sheet at their net book value. 10 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE
THREE MONTHS ENDED JUNE 30, -------------------------------- 2000 1999 ---- ---- NUMERATOR Income from continuing operations: Income from continuing operations: ................. $ (35,399) $ 72,156 Less: Preferred dividends ......................... -- -- -------- ---------- Income available to common stockholders used in basic EPS .................................. (35,399) BASIC 72,156 Income available to common stockholders after assumed conversions of dilutive securities ....... $ (35,399) DILUTED $ 72,156 =========== ========== DENOMINATOR Weighted average number of common shares outstanding - See schedule ........................ 6,084,141 BASIC 5,931,474 Impact of potential common shares: Stock options and warrants ......................... (*) 165,965 -------- ---------- Weighted average number of common shares and dilutive potential common stock used in dilutive EPS 6,084,141 DILUTED 6,097,439 ========= ========= BASIC EPS Income from continuing operations .................... $ (0.01) $ 0.01 DILUTED EPS Income from continuing operations .................... $ (0.01) $ 0.01 (*) not adjusted because the inclusion of such additional shares would be antidilutive
11 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE
THREE MONTHS ENDED JUNE 30, -------------------- 2000 1999 ---- ---- CALCULATIONS 1. Stock Options Treasury Stock Method Applied to Stock Options Sale of common stock Total options and warrants outstanding .... 2,563,375 486,800 Average price ............................. $ 1.30 $ 0.87 ---------- -------- Total ..................... $3,335,219 $423,400 ========== ======== Repurchase of common stock Proceeds .................................. $3,335,219 $423,400 Average stock price ....................... $ 2.26 $ 1.32 ---------- -------- Shares repurchased ........................ 1,472,821 320,835 ========== ======== Net increase in shares Shares sold ............................... 2,563,375 486,800 Shares repurchased ........................ 1,472,821 320,835 ---------- -------- Increase in shares ........................ 1,090,554 165,965 ========== ========
12 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE Computation of Weighted Average Number of Common Shares Outstanding THREE MONTHS ENDED JUNE 30, 2000 -------------------------------------- Weighted Dates Shares Fraction of Average Outstanding Outstanding Period Shares ----------- ----------- ------ ------ April through June .......... 6,084,141 3/3 6,084,141 Weighted Average Shares ..... 6,084,141 THREE MONTHS ENDED JUNE 30, 1999 -------------------------------------- Weighted Dates Shares Fraction of Average Outstanding Outstanding Period Shares ----------- ----------- ------ ------ April through May ....................... 5,928,141 2/3 3,952,094 Common stock issued in connection with Conversion of Class B warrants ...... 10,000 ------ June .................................... 5,938,141 1/3 1,979,380 ========= --------- Weighted Average Shares ................. 5,931,474 ========= 13 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE
NINE MONTHS ENDED JUNE 30, ---------------------------------------------- 2000 1999 ---- ---- NUMERATOR Income from continuing operations: Income from continuing operations: ................. $ 552,467 $ 185,860 Less: Preferred dividends ......................... -- -- ------------- ----------- Income available to common stockholders used in basic EPS ................................. 552,467 BASIC 185,860 Income available to common stockholders after assumed conversions of dilutive securities ....... $ 552,467 DILUTED $ 185,860 ============= =========== Loss from extraordinary item ............................ -- $ (277,000) ------------- ----------- DENOMINATOR Weighted average number of common shares outstanding - See schedule ......................... 6,089,974 BASIC 5,670,808 Impact of potential common shares: Stock options and warrants ......................... 1,307,255 107,846 ------------- ----------- Weighted average number of common shares and dilutive potential common stock used in dilutive EPS 7,397,229 DILUTED 5,778,654 ------------- ----------- BASIC EPS Income from continuing operations .................... $ 0.09 $ 0.03 Extaordinary Item .................................... 0.00 (0.05) ------------- ----------- $ 0.09 $ (0.02) ============= =========== DILUTED EPS Income from continuing operations .................... $ 0.07 $ 0.03 Extraordinary Item ................................... 0.00 (0.05) ------------- ----------- $ 0.07 $ (0.02) ============= ===========
14 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE
NINE MONTHS ENDED JUNE 30, ---------------------- 2000 1999 ---- ---- CALCULATIONS 1. Stock Options Treasury Stock Method Applied to Stock Options Sale of common stock Total options and warrants outstanding .... 2,577,375 486,800 Average price ............................ $ 1.36 $ 0.87 ---------- -------- Total ..................... $3,517,719 $423,400 ---------- -------- Repurchase of common stock Proceeds .................................. $3,517,719 $423,400 Average stock price ...................... $ 2.77 $ 1.12 ---------- -------- Shares repurchased ....................... 1,270,120 378,954 ---------- -------- Net increase in shares Shares sold .............................. 2,577,375 486,800 Shares repurchased ....................... 1,270,120 378,954 ---------- -------- Increase in shares ....................... 1,307,255 107,846 ========== ========
15 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE Computation of Weighted Average Number of Common Shares Outstanding NINE MONTHS ENDED JUNE 30, 2000 -------------------------------------- Weighted Dates Shares Fraction of Average Outstanding Outstanding Period Shares ----------- ----------- ------ ------ October through November ............... 6,101,641 2/9 1,355,920 Purchase of treasury stock ............. 10,000 --------- December through January ............... 6,091,641 2/9 1,353,698 Purchase of treasury stock ............. 5,000 --------- February ............................... 6,086,641 1/9 676,293 Purchase of treasury stock ............. 2,500 --------- March .................................. 6,084,141 4/9 2,704,063 --------- Weighted Average Shares ................ 6,089,974 ========= NINE MONTHS ENDED JUNE 30, 1999 -------------------------------------- Weighted Dates Shares Fraction of Average Outstanding Outstanding Period Shares ----------- ----------- ------ ------ October through November ............... 4,798,141 2/9 1,066,254 Common stock issued in connection with conversion of private placement debt in December .................. 1,108,000 --------- December through February ............. 5,906,141 3/9 1,968,714 Common stock issued in connection with conversion of Class B warrants .... 22,000 --------- March thru May ......................... 5,928,141 3/9 1,976,047 Commom stock issued in connection with conversion of Class B warrants ..... 10,000 --------- June ................................... 5,938,141 1/9 659,793 --------- Weighted Average Shares ................ 5,670,808 ========= 16 PART I. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's Financial Statements and the notes thereto appearing elsewhere in this Report. This Report contains statements which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company cautions that forward-looking statements are not guarantees of future performance and involve risks and uncertainties, (including those identified in "Risk Factors" in the Company's form 10-KSB for the year ended September 30, 1999) and that actual results may differ materially from those in the forward-looking statements as a result of various factors. The following discussion and analysis compares the results of the Company's continuing operations for the Three and Nine Months ended June 30, 2000, and the Three and Nine Months ended June 30, 1999. THREE MONTHS ENDED JUNE 30, 2000 (THE "2000 QUARTER") COMPARED TO THREE MONTHS ENDED JUNE 30, 1999 (THE "1999 QUARTER") The 2000 Quarter reflected a net loss of $35,400 compared to net income of $72,100 in the 1999 Quarter. Basic and diluted earnings per share from continuing operations decreased to a loss of $0.01 in the 2000 Quarter from a income of $0.01 in the 1999 Quarter. REVENUES. Net sales decreased $348,600 (9%) to $3,473,000 in the 2000 Quarter, from $3,821,600 in the 1999 Quarter. The Company's domestic sales increased $812,000 while its European sales decreased $1,160,600. The decrease in revenues outside the U.S. (Europe and Asia) is attributable to lower orders from the Company's major customer. OPERATING INCOME. Consolidated pretax income from continuing operations decreased by $179,300, to a loss of $59,000 in the 2000 Quarter from $120,300 in the 1999 Quarter. Sales decreased $348,600 resulting in a reduction in gross margin of $66,000. Gross margin percentage increased from 29% to 30% in the 2000 quarter partially offsetting the impact of lower sales. In addition, the Company incurred and accrued non-recurring expenses of $187,000, in connection with the relocation of its South Bend, Indiana and New York offices to Pompano Beach, Florida. Selling expenses increased $201,000 (49%) from $408,300 in the 1999 Quarter to $609,300 in the 2000 Quarter due primarily to increased travel expenses, commissions, and recruiting fees. The ratio of selling expenses to net sales increased from 11% to 18%. General and administrative expenses decreased as a percentage of net sales to 9% in the 2000 Quarter from 15% in the 1999 Quarter and the dollar amount of expenses decreased $229,700 (41%) to $328,900 in the 2000 Quarter from $558,500 in the 1999 Quarter. The decrease is primarily related to reductions in professional fees and bonuses. The Company incurred $187,000 in relocation costs relating to the consolidation of its offices into a single office in Pompano Beach Florida. There was no such amount in the comparable quarter of the prior year. OTHER INCOME (DEDUCTIONS). Total interest expense increased $6,200 to $31,600 in the 2000 Quarter from $25,400 in the 1999 Quarter due to higher interest rates. Interest income and other income-net increased $59,400 to $50,700 in the 2000 Quarter from a net expense of $8,700 in the 1999 Quarter. The increase resulted from higher earnings on invested funds, the sale of certain assets no longer needed, and non-recurring refunds. 17 INCOME TAXES. The provision for income taxes decreased by $71,700 due to a decrease in pretax profits of $179,300 in the 2000 Quarter from the comparable period in the 1999 Quarter. The effective tax rates for the 2000 and 1999 Quarters were 40%. NINE MONTHS ENDED JUNE 30, 2000 (THE "2000 PERIOD") COMPARED TO NINE MONTHS ENDED JUNE 30, 1999 (THE "1999 PERIOD") The 2000 Period reflected a net income of $552,500 compared to a net loss of ($91,100) in the 1999 Period. In the 1999 Period, operations generated net income of $185,900 prior to the extraordinary non-cash charge of $277,000 (described below) from continuing operations. Accordingly, the increase in net income from continuing operations was $366,600. Basic earnings per share from continued operations increased to $.09 in the 2000 Period from $0.03 in the 1999 Period, while diluted earnings per share from continuing operations increased to $.07 in the 2000 Period from $0.03 in the 1999 Period. REVENUES. Net sales increased $1,093,400 (10%) to $12,513,700 in the 2000 Period, from $11,420,300 in the 1999 Period. The increase is attributable to growth in business from both domestic and European geographic segments, which increased $689,000 and $404,400, respectfully. OPERATING INCOME. Consolidated pretax income from continuing operations increased by $444,300 from a profit of $309,800 in the 1999 Period, to $754,100 in the 2000 Period. The increase in pretax profits relates to increases in revenues, described above, coupled with improved gross margin percentage. Gross profit increased $812,700 from $3,318,200 to $4,130,900 in the 2000 Period, while the gross margin percentage increased from 29% in the 1999 Period to 33% in the 2000 Period. The higher gross margin percentage is largely a result of higher revenues without the fixed cost component of a manufacturing facility. Selling expenses increased $389,500 (34%) from $1,160,500 in the 1999 Period to $1,550,000 in the 2000 Period due primarily to increases in travel expenses, commissions, consulting and professional fees for recruiting new sales staff, offset by lower advertising and bonuses. The ratio of selling expenses to net sales increased to 12% from 10%. General and administrative expenses decreased as a percentage of net sales, to 12% in the 2000 Period from 16% in the 1999 Period, and the dollar amount of expenses decreased $229,200 (12%) to $1,635,000 in the 2000 Period from $1,864,300 in the 1999 Period. This decrease is primarily the result of lower professional fees, bonuses, expenses, and telephone costs. The Company incurred $187,000 in relocation costs relating to the consolidation of its offices into a single office in Pompano Beach Florida. There was no such amount in the prior year. OTHER INCOME (DEDUCTIONS). Total interest expense decreased by $2,200 to $95,500 in the 2000 Period from $97,700 in the 1999 Period. Lower borrowings resulting from better collections were offset by higher interest rates. Interest and other income-net decreased $23,200 to $90,800 in the 2000 period from $114,000 in the 1999 Period. The decrease is primarily related to the sale of certain miscellaneous assets in the 1999 Period, which were no longer required as a result of the shutdown of the South Bend manufacturing facility. EXTRAORDINARY ITEM IN THE 1999 PERIOD. In December 1997, the Company consummated a private offering of securities which included $554,000 in aggregate principal amount of convertible Promissory Notes. The Notes were converted into Common Stock and warrants in December 1998, 18 at the option of the Company. In connection with the conversion of its Notes into Common Stock, the Company recorded a non-cash, extraordinary charge against earnings of $277,000. This amount, recorded as interest expense, reflects the difference between the average bid and asked price per share of the Company's stock on December 4, 1998 (the date on which such conversion occurred) on the Nasdaq SmallCap Market, $.75, and, the price at which the Company converted such shares, $.50, aggregated by the total shares issued. There was no comparable item in the 2000 Period. INCOME TAXES. The provision for income taxes increased by $77,700 due to an increase in pretax profits in the 2000 Period from the comparable period in 1999 Period. The effective tax rates for the 2000 and 1999 Periods were 27% and 40%, respectively. No tax benefit was recorded during the 1999 Period relating to the extraordinary interest charge as it was not deductible for income tax purposes. The lower rate in the 2000 Period is the result of a reduction in the valuation allowance established for deferred taxes. LIQUIDITY AND CAPITAL RESOURCES. In the 2000 Period, $243,800 of cash was generated by operating activities. Funds were generated from net income of $552,500, collections of accounts receivable of $973,400, inventory reductions $181,300 plus the non-cash impact of deferred tax asset reductions $201,600, depreciation and amortization $105,100; these were offset by payments on accounts payable, accrued expenses and severance totaling $1,828,100. Net investing activities in the 2000 Period used cash of $447,500. The Company collected $201,600 of notes receivable, which arose from the sale of its discontinued operations in 1997 and provided $428,700 in additional loans to officers, net of collections, and expended $220,400 for new assets. Financing activities in the 2000 Period used cash of $249,550. Funds were used to repay the bank credit line, $185,900, pay debt costs of $9,200, and purchase 17,500 shares of the Company's stock in open market transactions for $54,500. In January, 2000 the Company obtained a $5.0 million credit line with a new bank to accommodate its growth, and terminated its former credit arrangement. The new credit line expires March 31, 2001 and is renewable annually. This credit facility has no borrowing formula limitations or specific covenants as did the former credit line. However a mandatory 30-consecutive-day period, in which there are no outstanding borrowings, is required along with continued reasonable business performance. On February 1, 2000 the Company repaid its outstanding balance at the former bank with the proceeds from initial borrowings under the new credit line. The new credit line provides for cash and direct borrowings up to $3.0 million and letters of credit and acceptances of $2.0 million. The line bears interest at the prime rate in effect from time to time plus three quarters of one percent. The Company secured the line of credit with all of its assets and those of Koszegi. At June 30, 2000, the Company was indebted to the bank in the amount of $810,000. However, subsequent collections of accounts receivable enabled the Company to pay the loan in full on July 25, 2000. In addition, the Company renovated a building which it owns, adjacent to its former leased factory in South Bend, to house its remaining sales staff, customer support and other administrative personnel who remain in Indiana. The renovation, which was completed at the end of February 1999, cost approximately $107,000 and was paid from the Company's existing funds. The Company, like many others which own computer software, was required to address the issue of software applications which were unable to recognize `OO' in their program code. The Company evaluated alternatives to resolve this problem and concluded that acquiring a new data system, rather than upgrading its existing systems and applications, was of greater long-term value. The Company expended approximately $150,000 during fiscal 1999, encompassing the cost of installing new hardware and software. Such amounts were paid from existing cash. The Company incurred internal staff costs associated with training. Cost of staff time was expensed as incurred, while cost of the new system was capitalized and is being amortized over its useful life. In connection with its restructuring during fiscal 1998, the Company hired a new Chief Executive Officer and received the resignation of Mr. Theodore H. Schiffman, its co-founder and former Chief Executive Officer. Mr. Schiffman received a five-year consulting arrangement with annual consulting payments of $200,000 per year and a severance package totaling $350,000, of which $200,000 was paid on January 1, 1999, and the remainder paid in varying amounts and dates through April 15, 2000. Such amounts were paid out of the Company's existing cash position or from internally generated funds. The Company determined that for managerial and cost efficiencies it would close and consolidate its New York and South Bend offices into one office in Deerfield Beech, Florida. The consolidation is expected to occur during the third and fourth fiscal quarters. During the third quarter ended June 30, 2000 the Company incurred and/or reserved for costs which equated 19 to approximately $187,000. The Company intends to sell its building in South Bend, Indiana (which it had recently renovated, as described above) and has accordingly established a brokerage relationship to effect such sale. Market comparisons currently indicate that the fair market value of the building and land is equal to, or greater than its net book value. The property became available during the first week of August, 2000. The Company extended ninety (90) day, unsecured loans to two of its officers/directors which bear interest at the prime rate in effect from time to time, plus three quarters of one percent. One note, provided on December 16, 1999 in the amount of $40,000, was extended at the discretion of the Company and paid in full, with accrued interest, on June 29, 2000 in the amount of $42,000. The second note in the amount of $370,000 was issued on April 24, 2000, and subsequently the Company obtained the right to file a mortgage and lien against the property, as well as a pledge of 350,000 shares of Forward Industry common stock as additional security. In August, 2000 approximately $60,000 of this note was repaid. The Company extended the remaining loan sixty (60) days, through September 28, 2000. The loans were made from the Company's existing cash position. The Company did incur long-term debt in the 2000 Period in the form of capitalized lease obligation of $118,000, which is being paid over a five-year period. DEFERRED INCOME TAXES. The Company's balance sheet at June 30, 2000 includes $1,212,400 of deferred income taxes as an asset. The Company was profitable in the 2000 Period and, in fiscal year 1999 and in fiscal year 1998 before restructuring charges associated with the non-recurring costs of the shutdown of its South Bend plant. However, to the extent that the Company's operations may not be profitable in future periods, the Company would not be able to realize the benefit of its deferred tax assets. Without such deferred tax assets, at June 30, 2000, the Company's stockholder's equity at such date of $5,622,600 would have been reduced by $1,212,400 to a stockholder's equity of $4,410,200 and the Company's working capital at June 30, 2000 would have been reduced by $502,600 from $4,057,100 to $3,554,500. 20 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On July 15, 1998, Hollco International Limited ("Hollco"), a former Asian contractor which manufactured custom carrying cases for the Company, commenced a claim against the Company in an amount of $140,500 which Hollco alleges that it is owed for cases which it manufactured under order from the Company. The Company believes that these charges were offset wholly by product defects and rejects as well as additional costs incurred by the Company, including air shipment of product to avoid loss of market share. The Company had charged Hollco by issuing its invoices for these expenses and may file a separate counter suit against Hollco for these and other charges to offset any claims of Hollco. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS The Company held its Annual Meeting of Stockholders on May 31, 2000. The following matters were voted upon at the Annual Meeting of Shareholders: 1. Election of a Board of Directors. Number of Shared Voted -------------------------------- Name For Against Abstain ---- --- ------- ------- Jerome E. Ball ................ 5,088,055 9,692 -- Theodore H. Schiffman.......... 5,088,055 9,692 -- Michael Schiffman ............. 5,088,055 9,692 -- Samson Helfgott ............... 5,088,055 9,692 -- Norman Ricken ................. 5,088,055 9,692 -- Noah Fleschner ................ 5,088,055 9,692 -- 2. Ratification of the appointment of Patrusky, Mintz & Semel as the independent auditors and accountants for the Company for the year ending September 30, 2000. Number of Shares ------------------------------------------ For Against Abstain --- ------- ------- 5,055,685 11,352 30,710 ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 27: Financial Data Schedule (b) Reports on Form 8-K None. 21 SIGNATURE In accordance with to the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: August 11, 2000 FORWARD SYSTEMS, INC. (Registrant) By: /s/ Philip B. Kart -------------------------------- PHILIP B. KART Principal Financial Officer