-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TrrNMrguy0LjMZE/H6i2QshrlZZkzm8HGDNowU4wslTHR75mQ6/umIY2zi5jyAgA uPEUEXwZXRWI+X1a+eeZFw== 0000912057-99-009692.txt : 19991217 0000912057-99-009692.hdr.sgml : 19991217 ACCESSION NUMBER: 0000912057-99-009692 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FORWARD INDUSTRIES INC CENTRAL INDEX KEY: 0000038264 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS PRODUCTS, NEC [3089] IRS NUMBER: 131950672 STATE OF INCORPORATION: NY FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-06669 FILM NUMBER: 99776154 BUSINESS ADDRESS: STREET 1: 400 POST AVENUE CITY: WESTBURY STATE: NY ZIP: 11590 BUSINESS PHONE: 5163380700 MAIL ADDRESS: STREET 1: 400 POST AVENUE CITY: WESTBURY STATE: NY ZIP: 11590 10KSB 1 10K Document 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB (Mark One) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934: For the fiscal year ended September 30, 1999 / / 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. (Name of small business issuer 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) Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.01 Par Value ---------------------------------------------------------- (Title of class) Check whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / /. Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. /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. Transitional Small Business Disclosure Format: Yes / / No /X/ -1- PART I THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS FORWARD LOOKING STATEMENTS THAT INVOLVE CERTAIN RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD LOOKING STATEMENTS. SEE "CAUTIONARY STATEMENT REGARDING FORWARD - LOOKING STATEMENTS" CONTAINED IN PART II, ITEM 6 OF THIS REPORT. ITEM 1 - DESCRIPTION OF BUSINESS GENERAL Forward Industries, Inc. (together with its subsidiaries, unless the context requires otherwise, "Forward" or the "Company") was incorporated in 1961 under the laws of the State of New York. For several years prior to the 1989 acquisition of Koszegi Industries, a manufacturer of soft-sided carrying cases (see "Products"), the Company's sales were approximately equally divided between those of vinyl advertising specialties and loose-leaf ring and post binders; both were manufactured by the Company. During recent years, Koszegi Industries (the carrying case business) progressively became the most significant division of the Company's operations. In September 1997, the Company sold its assets relating the production of advertising specialties and ceased operating that portion of its business, to focus on the carrying case business. The Company had been producing soft-sided carrying cases in its South Bend, Indiana manufacturing plant and overseas through contract-manufacturers. However, with the increase in carrying case production occurring in the Asian market, the Company established an alternative source of domestic production, thereby enabling the Company to close its manufacturing operation in South Bend on February 28, 1999 and eliminate the related costs of domestic manufacture. See "Production and Materials." In October 1998, Jerome E. Ball joined the Company as its new Vice Chairman of the Board and Chief Executive Officer, and then became Chairman replacing Theodore H. Schiffman, who retained his position as Chairman through March 1999 and became Chairman Emeritus and a consultant to the Company thereafter. The Company has its principal executive offices at 400 Post Avenue, Westbury, New York 11590 and sales and customer support at 713 South Scott Street, South Bend, Indiana 46624. The Company also maintains additional office and quality control facilities in Hong Kong and has other minor leases for office or warehouse space in Denmark, Australia, Scotland and Germany. See Item 2, "Description of Property." PRODUCTS CUSTOM CARRYING CASES. The Company designs and markets custom soft-sided carrying cases and bags from leather, nylon, vinyl and other synthetic fabrics (the "carrying case business") through its wholly-owned subsidiary, Koszegi Industries, Inc. These carrying cases and bags are utilized for transporting portable products such as cellular telephones, medical instruments, computers, and hand tools. The carrying case business accounted for all of the Company's net sales in the fiscal year ended September 30, 1999 and 1998 ("Fiscal 1999, and Fiscal 1998") and approximately 85% of the Company's net sales during its fiscal year ended September 30, 1997 ("Fiscal 1997"). Since its acquisition of the carrying case business in 1989, the Company has concentrated its marketing and development efforts on original equipment manufacturers in the communications (principally cellular telephones), computer and medical instrumentation industries. In April 1995, the Company expanded its product line to include laptop/notebook computer cases marketed for general retail distribution under the Terrapin(TM) brand name. See "Marketing and Distribution. -2- MARKETING AND DISTRIBUTION CUSTOM CARRYING CASES. The Company markets its custom carrying cases to original equipment manufacturers, principally in the communications, medical and testing and measurement equipment industries. Such cases are manufactured to customer specifications and usually bear the customer's identifying logo imprint. During Fiscal 1999, approximately 14% of the Company's sales were made through five independent sales representative organizations which receive a commission equal to 5% of net sales made by them. The balance of such sales were made by Company personnel. In Fiscal 1999 and 1998, approximately 71% and 31% of custom case sales, respectively, were made to customers outside of the United States (approximately 5% in Fiscal 1996). The Company had emphasized its marketing effort in this region and expects that those sales will continue as the greater percentage of its business in the near term. The Company has no long-term agreements with any of its customers. One of the Company's customers, together with its respective international affiliates, accounted for approximately 60% of the Company's sales in Fiscal 1999; and two of the Company's customers together with their respective international affiliates, accounted for approximately 39% and 16%, respectively, of the Company's net sales from continuing operations during Fiscal 1998. The loss of these customers would have a material adverse effect on the Company. In order to reduce its reliance upon major customers, whose orders may vary substantially from period to period depending upon the success of their products utilizing the Company's carrying cases, the Company is seeking to increase and diversify its customer base, particularly in Asia and Europe. The Company presently has approximately 100 active carrying case customers. COMPUTER CASES. In April 1995, the Company commenced marketing a line of notebook computer carrying cases to retailers and consumers under the Terrapin(TM) brand name. These cases, which are manufactured in nylon, leather and hardshell thermoformed materials, provide storage space for a computer and related items and may be utilized as a "portable office" by the computer user. Although sales of the Terrapin(TM) products have not met expectations, management believes that the growth of the notebook computer market offers it an opportunity to diversify its product line, and to establish a brand identity for its products under the Terrapin(TM) name. The target sales areas for this line are large retail chain computer outlets, large direct mail order houses small computer equipment manufacturers and resellers, and original equipment manufacturers. The Company also redirected its strategic selling efforts for its Terrapin(TM) computer case line through the Internet. It announced the launch of a brand store at Onsale, Inc. (NASDAQ:ONSL) through which its cases have been offered for sale online. Onsale is a leading real-time retailer providing cost-competitive prices and service through the Internet. During Fiscal 1999 approximately 14,000 Terrapin(TM) cases were sold through Onsale. BACKLOG. At September 30, 1999, the Company's backlog of unfilled orders was approximately $6,880,000, as compared to an order backlog of approximately $2,455,000 at September 30, 1998. The Company anticipates that all of its backlog will be shipped during the current fiscal year. CREDIT RISK. The Company sells its products on credit terms customary in the industry, and has not had significant credit problems with its customers. At September 30, 1999, one of the Company's largest customers and their international affiliates accounted for approximately 79% of the Company's accounts receivable (three customers accounting for 67% at September 30, 1998). Any failure of such customers to pay the sums they owe to Company when due would have a material adverse effect on the Company. -3- PRODUCTION AND MATERIALS The principal materials used in the manufacture of the Company's products are vinyl, nylon, leather, metal and plastic parts (such as corners, clips, buckles, loops, and hinges and other hardware), foam padding and cardboard, all of which are obtained according to the Company's specifications from domestic and foreign suppliers. The Company does not have any long-term agreements with any supplier and there are adequate available alternative sources of supply for all of its materials. Manufacturing of custom carrying cases generally consists of die cutting fabrics, leather and vinyl from rolls, heat sealing, gluing, sewing, and decorating (affixing logos) by means of silk screening, hot-stamping, embroidering, or embossing. In order to achieve lower production costs for its products and to enable the Company to increase its production capacity without incurring significant capital costs for expanded facilities and equipment, the Company has, since 1992, utilized foreign contractors to manufacture its carrying cases to the extent practicable. Such foreign contractors produced approximately 88% of the Company's carrying cases in Fiscal 1999 and approximately 78% in Fiscal 1998. The Company does not have any written agreements with any of such contractors to continue to supply the Company with finished product. During recent years, production at the Company's South Bend manufacturing facility declined due to cost competition from overseas suppliers. As a result, the Company could no longer maintain this facility profitably due to under-utilized capacity at the plant. In September 1998, the Company announced it would close its domestic manufacturing operations by February 28, 1999. It also announced that production demands which require domestic manufacture would be produced by MedCovers, Inc., in Raleigh, North Carolina, under contractual agreement between the two parties. A second contract manufacturer was added during Fiscal 1999 to support domestic production. The Company sold to MedCovers, Inc. specialized equipment utilized in the manufacture of its products and provided training in aspects of its production. The original arrangement with MedCovers is being reevaluated and may be cancelled to allow the Company to pursue alternative primary contractors. During Fiscal 1999, one of the Company's foreign contractors produced approximately 36 % of the Company's carrying cases and approximately 46% in Fiscal 1998. The failure of such contractor to continue to supply the Company with product would have a material adverse effect on the Company. The Company expanded the number of foreign contractors it uses to reduce such reliance. Currently, there are four contractors which are regularly producing products for the Company. In order to assure that product manufacturing by foreign contractors meets the Company's standards, the Company maintains a quality control inspection facility in Hong Kong. This facility inspects all outsourced production and during Fiscal 1999, received ISO 9002 certification. The Company's overseas contractors are located principally in Asia, but the Company is evaluating (if it has the funds available) its production capability in Europe as well as in Asia. Management believes that such expansion will facilitate delivery of product to foreign customers and provide for lower cost production of carrying cases for which there is significant demand. Such expansion will require further financing, for which no arrangements have been made. In some instances, the Company may provide equipment to overseas contractors or share in its cost. All of the custom carrying cases are manufactured to customer order. The Terrapin(TM) products have, to date, been manufactured for inventory. Products are shipped to customers by common carrier. -4- COMPETITION The business in which the Company engages is highly competitive and there are competitors which are substantially larger than the Company and have greater financial and other resources. In the production of carrying cases for original equipment manufacturers, the Company competes with approximately 1,500 United States and foreign producers. Management believes that the Company maintains its competitive position through maintenance of an extensive line of products, design capability, strategic pricing policies, reliable product delivery and quality. EMPLOYEES At September 30, 1999, the Company had approximately 43 full-time employees, of whom five are employed in executive capacities, 14 are employed in administrative and clerical capacities, 14 are employed in sales and sales support capacities and the balance in quality control and warehouse capacities. From time to time, use is made of full-time temporary workers (eleven at September 30, 1999), primarily as quality control inspectors in its Hong Kong quality control facility. The number of employees varies, depending on production requirements. The Company considers its employee relations to be satisfactory. ENVIRONMENTAL PROTECTION Compliance with Federal, state and local laws and regulations pertaining to the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had, and is not anticipated to have, any material effect upon the capital expenditures, earnings or competitive position of the Company. ITEM 2 - DESCRIPTION OF PROPERTY The Company, through a subsidiary, formerly leased manufacturing and office space at 702 South Chapin Street, South Bend, Indiana on a net lease basis through February 28, 1999 at an annual rental of $204,000 plus real estate taxes thereon (which aggregated approximately $97,000 during Fiscal 1998, the Company's last full year at the premises, on an accrual basis). The lease was not renewed upon expiration. See "Production and Materials." These premises had a total floor area of approximately 80,000 square feet, 70,000 square feet of which were used for manufacturing and storage, and the balance of 10,000 feet was used for offices. The subsidiary also owns and has renovated for office and for warehousing purposes, a 7,000 square foot building at 713 Scott Street, South Bend, Indiana, which it purchased in 1990 for $125,000. The Company's sales, customer service and selected administrative staff have occupied this space since the termination of its lease at 702 South Chapin Street, South Bend, Indiana. The Company considers its properties in Indiana to be suitable and adequate for its present and contemplated use thereof. The Company, through a Hong Kong subsidiary, leases warehouse and office space in Hong Kong (pursuant to a lease running through May 2002) at which its quality control inspection facilities are located, at a monthly rental of approximately $7,000. The Company also has several minor leases for offices or public warehouse space in Copenhagen, Denmark; Sydney, Australia; Scotland, and Germany on a monthly basis or as needed. The Company leases office space for its executive and accounting offices at 400 Post Avenue, Westbury, New York, at a rental of approximately $5,400 per month. The five-year lease terminates in June 2003, but is cancelable without cost to the Company at the end of the third year. -5- ITEM 3 - LEGAL PROCEEDINGS On July 15, 1998, Hollco International Limited ("Hollco"), a former Asian contractor which manufactured custom carrying cases for the Company, commenced a claim against the Company in 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. The Company has a counter claim against Hollco for these and other charges, and believes that the outcome of this matter will not have a material effect on the Company. ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. -6- 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.
COMMON STOCK PERIOD HIGH BID LOW BID 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
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:
CLASS B WARRANTS PERIOD HIGH BID LOW BID 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
-7- 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. 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. 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. 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. -8- 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 (the "1999 Period"), 1998 (the "1998 Period") and 1997 (the "1997 Period"). The information and comparative data presented herein reflects the elimination of the Company's advertising specialties division (the "Advertising Specialties division"). TWELVE MONTHS ENDED SEPTEMBER 30, 1999 (THE "1999 PERIOD") COMPARED WITH TWELVE MONTHS ENDED SEPTEMBER 30, 1998 (THE "1998 PERIOD"). The Company's net profit (loss) increased from a net loss of ($1,078,800) in the 1998 Period to a profit of $835,800 in the 1999 Period, an increase of $1,914,600. Excluding a non-recurring, non-cash , extraordinary charge to earnings of $277,000 in the 1999 Period described below, net profit from continuing operations was $1,112,800, an increase of $2,191,600. Basic and diluted earnings per share from continuing operations increased from a loss of ($.23) to a profit of $.19 in the 1999 Period. REVENUES Net sales increased $7,524,300 (58%) to $20,553,200 in the 1999 Period, from $13,028,900 in the 1998 Period. The increase is attributable to growth in business from both existing and new customers, and specifically to the Company's expansion efforts in its European operations and customer accounts. OPERATING INCOME Consolidated income (loss) from continuing operations before tax increased by $2,917,000 to a profit of $1,654,300 in the 1999 Period from a loss of ($1,262,700) in the 1998 Period. The increase relates 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 $2,567,600 to $6,245,400 in the 1999 Period from $3,677,800 in the 1998 Period. The gross profit percent increased to 30% in the 1999 Period from 28% in the 1998 Period. The increase in absolute dollars is attributable to higher sales described above, while the increase in margin percent is attributable to the streamlining of, and 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 the 1999 Period from $1,439,700 in the 1998 Period. However, the ratio of selling expenses to net sales declined to 9% in the 1999 Period from 11% in the 1998 Period. The increase in absolute dollars was primarily the result of 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 the 1999 Period from 17% in the 1998 Period, while the dollar amount increased $546,600 (24%) to $2,800,000 in the 1999 Period from $2,253,400 in the 1998 Period. The increase in the general and administrative expenses relates -9- primarily to compensation associated with the Company's new 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 1998 Period in connection with the shutdown of the Company's South Bend, Indiana production facility. No similar amounts were incurred in the 1999 Period. OTHER INCOME Total interest expense decreased by $229,000 (76%) to $73,400 in the 1999 Period from $302,400 in the 1998 Period. The decrease was due to lower interest rates, lower outstanding bank borrowings due to better collections of accounts receivable, the conversion of notes payable into common stock in the 1999 Period, and the repayment of the mortgage on the Company's building in December, 1997. Interest and other income - net decreased $839,500 in the 1999 Period from income of $766,400 in the 1998 Period 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 during the 1998 Period, accounting for the primary portion of the difference. INCOME TAXES The provision for income taxes increased by $114,900 due to higher earnings, and offset, in part, by a reduction in the valuation allowances for deferred tax assets. The effective tax rate for 1999 Period was 26%. EXTRAORDINARY ITEM On December 4, 1998 the Company converted $554,000 of promissory notes into equity. In connection with this conversion, the Company recorded a non-cash, extraordinary charge against earnings of $277,000. This amount reflected the difference between the average bid and asked price per share of the Company's stock on the Nasdaq SmallCap Market on the date on which the conversion occurred, $.75, and the price at which the Company converted such shares, $.50, aggregated by the total shares issued. -10- TWELVE MONTHS ENDED SEPTEMBER 30, 1998 (THE "1998 PERIOD") COMPARED WITH TWELVE MONTHS ENDED SEPTEMBER 30, 1997 (THE "1997 PERIOD"). The Company's net profit (loss) decreased from a net profit of $139,400 in the 1997 Period to a loss of ($1,078,800) in the 1998 Period, a decrease of $1,218,200. The decrease in the 1998 Period was primarily related to two 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 $.04 to a loss of $.23 in the 1998 Period. REVENUES Net sales increased $292,600 (2%) to $13,028,900 in the 1998 Period, from $12,736,300 in the 1997 Period. 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(R) sales is partially the result of an initial stocking position ordered by one customer during the 1997 Period which did not reoccur in the 1998 Period, 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 the 1998 Period from a profit of $1,003,500 in the 1997 Period. 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 the 1998 Period from $4,396,000 in the 1997 Period. The gross profit percent decreased from 34.5% in the 1997 Period to 28.5% in the 1998 Period. The decrease is attributable primarily to the Company's Terrapin(R) 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 the 1998 Period due to certain high margin orders received in Fiscal 1997. Selling expenses increased by $68,300 (5%) from $1,371,400 in the 1997 Period to $1,439,700 in the 1998 Period. The ratio of selling expenses to net sales was 11% in both the 1998 and 1997 Period. The increase in selling expenses in the 1998 Period was primarily the result of an increase in commissions. General and administrative expenses, increased as a percentage of net sales, from 16% in the 1997 Period to 17% in the 1998 Period, while the amount increased $268,800 (14%) to $2,253,400 in the 1998 Period from $1,984,600 in the 1997 Period. 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 the 1997 Period 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, the 1998 Period 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 the 1998 Period 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. -11- Severance expense to a co-founder of the Company was recorded in the amount of $350,000 in the 1998 Fiscal Period; no comparable amount was included in the 1997 Fiscal Period. OTHER INCOME Total interest expenses increased by $102,500 (51%) to $302,400 in the 1998 Period from $199,900 in the 1997 Period due to interest associated with the indebtedness issued in connection with the Company's 1997 Private Placement, and, due to the amortization of deferred debt costs incurred in connection with both the 1997 Private Placement and the Company's new bank credit line which are included in interest income. The Company's rental building in Brooklyn, New York was not leased during the 1997 Period or rented in the 1998 Period. Rental income - net decreased to a loss of $60,700 in the 1998 Period from a loss of $106,200 in the 1997 Period. This property was sold in December 1997. [See discussion below.] Interest and other income - net increased $835,800 in the 1998 Period from the 1997 Period 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 the 1999 Period, $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 non-cash extraordinary charge of $277,000; 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. Net investing activities in the 1999 Period used cash of $12,500. 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 $51,130 from the sale of assets. In the 1999 Period, the Company purchased $375,300 of property, plant and equipment. The Company also repurchased 20,000 shares of its Common Stock in open market transactions, aggregating a cost of $63,000. Financing activities in the 1999 Period used cash of $197,900. 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. Offsetting this amount 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 the 1997 Private Placement of Units. Each Unit was comprised of (i) 30,000 shares of Common Stock, (ii) one Private Placement Warrant to purchase up to 30,000 shares of Common Stock at $4.00 per share and (iii) one unsecured convertible promissory note. The "Note" in -12- the principal amount of $10,000, bearing interest at a rate of 10% per annum (convertible at the sole option of the Company under certain circumstances, into 20,000 shares of Common Stock and one Private Placement Warrant) maturing on December 4, 1998. A total of 55.4 Units were sold for $25,000 per unit, aggregating gross proceeds of $1,385,000. Included in the Units sold was $554,000 aggregate principal amount of debt. A commission in the amount of $169,000 was paid by the Company in connection with such sales. The sales were made to accredited investors pursuant to Regulation D promulgated under the Securities Act of 1933, as amended. On December 4, 1998, the Company exercised its option to convert $554,000 of debt into 1,108,000 shares of Common Stock and Warrants to purchase 1,662,000 shares of Common Stock (such Warrants expired on March 15, 1999 and are no longer outstanding), and paid accumulated interest on the Notes of approximately $72,000. Certain officers and directors participated in this transaction. Forward and Koszegi Industries, Inc., a wholly-owned subsidiary of Forward ("Koszegi"), established a line of credit with a bank in April 1998 and are indebted to such bank for short-term borrowings and 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 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 -13- funds. The Company did not incur any other long-term debt in the 1999 Period. 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. -14- 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 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 -15- 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. 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 -16- 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 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. -17- 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. -18- PART III ITEM 9 - DIRECTORS EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; DIRECTORS AND EXECUTIVE OFFICERS. The directors and executive officers of the Company as of December 7, 1999 are as follows:
NAME AGE POSITION WITH THE COMPANY Theodore H. Schiffman 66 Chairman Emeritus Jerome E. Ball 61 Chief Executive Officer and Chairman of the Board (1) Michael Schiffman 34 President, Chief Operating Officer and Director (2) Noah Fleschner 63 Director Samson Helfgott 60 Director Philip B. Kart 50 Chief Financial Officer and Vice President (3) Stephen Schiffman 31 Secretary and Vice President of Marketing and Sales for Terrapin
(1) Jerome E. Ball was appointed Chief Executive Officer and Vice Chairman of the Company in October 1998 upon the resignation of Theodore H. Schiffman as Chief Executive Officer. In April 1999, Mr. Ball became Chairman. (2) Michael Schiffman served as the Company's Executive Vice President until April 1998 when he was appointed President and Chief Operating Officer, replacing William Mooar, who resigned from the Company. (3) Philip B. Kart was appointed Chief Financial Officer of the Company effective February 2, 1998. Prior to Mr. Kart's appointment, Theodore H. Schiffman served as the Company's Chief Financial Officer. Each of the directors holds office until the next annual meeting of shareholders and until his successor has been duly elected and qualified. THEODORE H. SCHIFFMAN, a co-founder of the Company, has been its Chairman and Chief Executive Officer for more than the past five years and has been a director since 1961. He became Chief Financial Officer in July of 1996 and served in that role until February 1998. In October 1998, Mr. Schiffman tendered his resignation and agreed to a five-year consulting and severance arrangement with the Company. The agreement called for Mr. Schiffman to retain his position as Chairman for six months after the date Mr. Ball joined the Company as Vice Chairman. At that time, Mr. Ball assumed the position of Chairman and Mr. Schiffman became Chairman Emeritus. JEROME E. BALL became Chief Executive Officer and Vice Chairman of the Board effective October 1, 1998 and became Chairman of the Board in April 1999. Before joining Forward Industries Mr. Ball served as Chairman and Chief Executive Officer of George Arzt Communications, a full service public relations firm. Prior to that, Mr. Ball had been president of Balson-Hercules Group, a textile manufacturing company which was sold to a Canadian Stock Exchange listed company, Consoltex Group, Inc., Ltd., where he served until 1996. MICHAEL SCHIFFMAN has been employed by the Company in various capacities and became a director in April 1992. Beginning as a salesman for the Company's advertising specialties products in 1985, Mr. Schiffman became marketing manager for such products in 1987 and, following the acquisition of the custom carrying case business in 1989, was appointed General Manager of that division. Mr. Schiffman has been the Company's Executive Vice-President and a director since 1992. From 1995 through June 1998, Mr. Schiffman was on assignment in Hong Kong due to the growing importance of foreign production. Upon his -19- return, he was appointed to President and Chief Operating Officer of the Company. Michael Schiffman is the son of Theodore H. Schiffman and the brother of Stephen Schiffman. See Item 1. "Description of Business-Production and Materials." NOAH FLESCHNER has been Chairman of the Board and Chief Executive Officer of Diversified Data Equipment Corp. and Verified System Solutions, Inc., sellers of new and used computer equipment to dealers and commercial end-users, for more than the past five years. Mr. Fleschner is a Certified Public Accountant. Mr. Fleschner became a director of the Company in October 1994. SAMSON HELFGOTT is a founding partner in the law firm of Helfgott & Karas, P.C. Prior to founding Helfgott & Karas, P.C., for 15 years Mr. Helfgott served as Counsel, in New York, to General Electric Company. Prior to his employment at General Electric, Mr. Helfgott was a Patent Attorney for Western Electric Company and for IBM Corporation. He has also worked in private practice for various law firms. Mr. Helfgott holds a Doctorate of Laws degree, cum laude, from Fordham University and is a member of the Bar of the State of New York and is admitted to practice before the United States Patent and Trademark Office and the Canadian Patent Office, the United States Court of Appeals for the Federal Circuit, and the Supreme Court of the United States. Mr. Helfgott became a director of the Company in February 1998. PHILIP B. KART became Vice President and Chief Financial Officer of the Company in February 1998. Mr. Kart has 23 years of financial and corporate planning experience. Mr. Kart served as Chief Financial Officer of OnGard Systems, Inc., a publicly held manufacturer of medical equipment, from March 1994 until December 1997. From 1989 until March 1994, Mr. Kart was a principal in Big Stone Partners, a financial consulting firm, and prior to that he held management positions with Agrigenetics Corporation and Union Carbide. Mr. Kart is a Certified Public Accountant and was employed by Price Waterhouse. Mr. Kart received an MBA from City College of New York. STEPHEN SCHIFFMAN has been employed by the Company in various capacities for more than the past five years. Beginning in 1990, Mr. Schiffman was employed in the production department, followed by a move to the Purchasing Department and Inventory Control in the Forward Division. Subsequently, Mr. Schiffman moved to the Marketing Department of the Koszegi division in 1995. Presently, Mr. Schiffman is Vice-President of Marketing and Sales for Terrapin and Secretary of the Company. Stephen Schiffman is the son of Theodore H. Schiffman and the brother of Michael Schiffman. Pursuant to their respective employment agreements with the Company, (a) Theodore Schiffman was employed as Chief Executive Officer through September 30, 2000, however, effective October 1, 1998, Mr. Schiffman tendered his resignation and agreed to a five-year consulting and severance arrangement; (b) Michael Schiffman is employed as President and Chief Operating Officer through September 30, 2001 and the Company has agreed to use its best efforts to elect him annually as a director; and (c) Jerome Ball is employed as Chief Executive Officer and Vice Chairman, effective October 1, 1998 through September 30, 2000, and assumed the position of Chairman six months after his commencement with the Company. See Item 10; "Executive Compensation" COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934. During Fiscal 1999, there were no delinquent filings by any reporting persons of the Company under Section 16(a) of the Securities Exchange Act of 1934. ITEM 10 - EXECUTIVE COMPENSATION SUMMARY OF COMPENSATION IN FISCAL 1999, 1998, AND 1997 The following table sets forth certain summary information regarding all cash and non-cash compensation paid by the Company during Fiscal 1999, Fiscal 1998 and Fiscal 1997 to each of its executive officers earning more than $100,000. -20-
SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION LONG TERM COMPENSATION SECURITIES NAME AND FISCAL OTHER ANNUAL UNDERLYING ALL OTHER PRINCIPAL POSITION YEAR SALARY COMPENSATION OPTIONS COMPENSATION JEROME E. BALL, 1999 $201,600 $20,000(a) 250,000 shares -- Chairman of the Board Chief Executive Officer (Effective Oct. 1, 1998) THEODORE H. SCHIFFMAN, 1999 $68,750 $150,000(b) -- Chairman Emeritus, 1998 $268,000 -- -- -- 1997 $275,000 200,000 shares -- MICHAEL SCHIFFMAN , 1999 $240,417(d) $25,828(a) 400,000 shares(a) -- President &Chief Operating 1998 $182,210 --(c) 300,000 shares -- Officer 1997 $150,000 --(c) 150,000 shares -- PHILIP KART, 1999 $130,000 $15,000(a) 75,000 shares -- Chief Financial Officer 1998 $86,667 -- -- --
(a) The Company has accrued $140,000, $194,000 and $40,000 in addition to bonus amounts paid, above, to Mr. Ball, Schiffman and Kart, respectively based on the results of Fiscal 1999, and in accordance with employment arrangements. (b) Reflects consulting payments made pursuant to contractual agreement. Excludes severance payments totaling $235,000. (c) Does not include rental value of apartment and related expenses provided to Mr. Schiffman, aggregating approximately $9,000 per month since July 1995, while on Company assignment in Hong Kong. (d) Includes $10,417 paid during Fiscal 1999 as a retroactive adjustment for salary increase. EMPLOYMENT AGREEMENTS Effective October 1, 1997, the Company entered into an employment agreement with Theodore H. Schiffman (the "THS Agreement") pursuant to which Mr. Schiffman was employed as Chief Executive Officer of the Company. The THS Agreement provided for an annual salary of $275,000 plus annual bonus compensation generally equal to 5% of net pre-tax annual income of the Company in excess of $1,000,000 (which is determined without taking into consideration bonus compensation payable to any employee, including Mr. Schiffman). Effective October 1, 1998, this agreement, which was due to expire on September 30, 2000, was terminated and the Company entered into a consulting agreement with Mr. Schiffman (the "THS Consulting Agreement"). Pursuant to this agreement, Mr. Schiffman receives an annual consulting fee of $200,000 for a period commencing January 1, 1999 and, ending December 10, 2003. In addition, Mr. Schiffman will receive severance payments totaling $350,000, of which $200,000 was paid on January 1, 1999 and $150,000 on the 15th-month anniversary thereof ($35,000 of such amount was used for the partial payment of a note due the Company from Mr. Schiffman on September 30,1999),and a reduction in the exercise price of his 450,000 options to $1.10 per share. Mr. Schiffman stepped down as Chairman six months after the date -21- Mr. Ball joined the Company and thereafter became Chairman Emeritus. If Mr. Schiffman dies during his consulting term, and if the Company is the recipient of at least $1,000,000 of proceeds of insurance on his life, the Company will pay to his widow, or if his wife has predeceased him, his estate, a monthly death benefit of $10,000 for a ten-year period. If the Company is not the recipient of at least $1,000,000 of insurance, such monthly death benefit will be paid for a period of three years, followed by a monthly death benefit of $5,000 for seven years; if his widow dies prior to the end of such ten year period, such payments will cease. The THS Consulting Agreement may be terminated as a result of bad faith conduct on the part of Mr. Schiffman. In addition, Mr. Schiffman has agreed to a three year non-compete arrangement and to maintain confidentiality of trade secrets and work product. Effective October 1, 1998, the Company entered into an employment agreement with Jerome E. Ball (the "JEB Agreement") pursuant to which Mr. Ball is employed as Chief Executive Officer and Vice Chairman, and six months thereafter, as Chairman, through September 30, 2000. The JEB Agreement provides for an annual salary of $201,600 plus an annual bonus equal to ten (10%) percent of the pre-tax operating profit in excess of $675,000 (which is determined without taking into consideration bonus compensation payable to any individual). For the fiscal year 1999, Mr. Ball received $20,000 as a prepayment and the Company accrued an additional $140,000 bonus pursuant to the terms of the agreement.. In addition, Mr. Ball received options to purchase 250,000 shares of Common Stock at an exercise price of $1.75 per share. Such options became exercisable by the end of the first year employment term. The JEB Agreement also provides that the Company grant Mr. Ball options to purchase up to an additional 250,000 shares of Common Stock at an exercise price of $2.00 per share if the Company's stock price averages $3.50 for a 180 day period. Effective October 1, 1998, the Company entered into an employment agreement with Michael Schiffman, employing Mr. Schiffman as President and Chief Operating Officer of the Company through September 30, 2001 at an annual salary of $230,000, plus annual bonus compensation equal to 3% of all sales by the Company over $13 million per year, payable on a pro rata basis quarterly during the following fiscal year. In addition, Mr. Schiffman was granted options to purchase up to 600,000 shares of Common Stock at the then current market price, in equal 200,000 share amounts, contingent upon the Company achieving sales of $16 million, $18.5 million, and $21 million in any fiscal year. During the fiscal year-ended September 30, 1999, Mr. Schiffman earned 400,000 options and was provided $25,828 as a prepayment and the Company accrued an additional $194,172 bonus pursuant to the terms of this agreement. -22- OPTION GRANTS The following table indicates all option grants to each of the individuals named in the Summary Compensation Table during Fiscal 1999. OPTION GRANTS IN FISCAL 1999
NUMBER OF PERCENTAGE OF TOTAL EXERCISE OPTIONEE UNDERLYING SHARES OPTION GRANT PRICE Jerome E. Ball 250,000 30% $1.75 Michael M. Schiffman 200,000 24% $1.88 Michael M. Schiffman 200,000 24% $3.25 Philip B. Kart 75,000 9% $2.00
STOCK OPTIONS HELD AT END OF FISCAL 1999 The following table indicates the total number of exercisable and unexercisable stock options held by each executive officer named in the Summary Compensation Table as of September 30, 1999. No options to purchase Common Stock were exercised during Fiscal 1999 and no stock appreciation rights were outstanding during Fiscal 1999. All options were in-the-money at the end of Fiscal 1999. NUMBER OF SECURITIES UNDERLYING UNEXERCISED OPTIONS AT SEPTEMBER 30, 1999
NAME EXERCISABLE UNEXERCISABLE Jerome E. Ball 250,000 -0- Theodore H. Schiffman 351,000 99,000 Michael Schiffman 751,000 99,000 Philip B. Kart 56,250 18,750
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Set forth below is information, as of December 7, 1999, with respect to the beneficial ownership of the Common Stock by (i) each person or group who is known by the Company to be the beneficial owner of 5% or more of the outstanding Common Stock, (ii) each of the directors of the Company, (iii) each of the executive officers of the Company named in the compensation table under Item 10, "Executive Compensation", and (iv) all directors and executive officers of the Company, as a group (five persons). Information as to Robert S. Ellin and related investors is based on a Schedule 13D, as amended, filed by such group. -23-
NUMBER OF SHARES PERCENT IDENTITY OF BENEFICIAL OWNERS OF COMMON STOCK OF CLASS Theodore H. Schiffman 671,100 shares (a)(b)(c) 10.2% 400 Post Avenue Westbury, New York 11590 Jerome E. Ball 450,500 shares(d) 7.1% 400 Post Avenue Westbury, New York 11590 Robert S. Ellin and related investors 796,167 shares (e) 13.0% 750 Lexington Avenue New York, NY 10022 Michael Schiffman 1,200,327 shares (b)(c) 17.3% 400 Post Avenue Westbury, New York 11590 Philip B. Kart 96,250 shares 1.6% 400 Post Avenue Westbury, New York, 11590 Noah Fleschner 330 shares * 400 Post Avenue Westbury, New York 11590 Samson Helfgott --- --- 400 Post Avenue Westbury, New York 11590 All directors and executive 2,494,152 shares 32.3% officers as a group (5 persons) (a)(b)(d)(f)
(a) Includes 40,700 shares owned by Mr. Schiffman's wife, as to all of which shares Mr. Schiffman disclaims beneficial ownership. (b) Includes 150,000 shares subject to options granted by the Company on October 12, 1994 to each of Theodore H. Schiffman and Michael Schiffman at an exercise price of $1.50 per share and 300,000 shares subject to options granted by the Company on November 15, 1996 to each of Theodore H. Schiffman and Michael Schiffman at an exercise price of $2.00 per share. Theodore H. Schiffman's option price, for all such options was reduced to $1.10 in connection with his resignation and the THS Consulting Agreement. (c) Theodore H. Schiffman, the Chairman Emeritus of the Company, is the father of Michael Schiffman, the Executive Vice President and a director of the Company and Stephen Schiffman, the Secretary of the Company. Each of Theodore H. Schiffman, Michael Schiffman and Stephen Schiffman disclaims beneficial ownership of shares beneficially owned by the others. (d) Includes 250,000 shares of Common Stock issuable upon the exercise of vested stock options. (e) Includes (i) 291,000 shares of Common Stock owned by Atlantis Equities, Inc. ("Atlantis"), a corporation for which Mr. Ellin is the sole officer and director, (ii) 37,500 shares of Common Stock owned by Robert Ellin Family 1997 Trust (the "Trust"), of which Mr. Ellin's father is the trustee and of which his minor children are -24- the beneficiaries as to which Mr. Ellin disclaims beneficial ownership, (iii) 89,500 shares of Common Stock owned by Mr. Ellin, (iv) 268,167 shares of Common Stock owned by the Robert Ellin Profit Sharing Plan (the "Plan") of which Mr. Ellin is the beneficiary, and (v) 110,000 shares of Common Stock held by Nancy J. Ellin, the wife of Mr. Ellin. (f) Includes 14,388 shares subject to options, in addition to those referred to in notes (a)(b) and (d) . *Less than 1.0%. ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company has made unsecured loans from time to time to Mr. and Mrs. Theodore H. Schiffman and to Mr. Schiffman's son Michael Schiffman. As of September 30, 1999, (a) Theodore A Schiffman had executed a promissory note to the Company in the principal amount of $235,535, bearing interest at 6% per annum, payable annually on September 30 of each year, commencing September 30, 1996, with the first four installments each in the sum of $50,000 and the remaining balance due, in, principal amount of $93,703, due at September 30, 1998. The THS Consulting Agreement requires repayment of the loan in full out of his consulting fee over the term of such agreement, accordingly $73,961 remains outstanding at September 30, 1999 after the first of five annual payments, and (b) Michael Schiffman had executed a similar note in the principal amount of $50,000 in principal amount, bearing interest at 7% per annum, payable in equal annual installments of $10,000 each September 30 commencing September 30, 1996 through September 30, 2000, of which $10,000 in principal amount, plus interest, remains due. The balance of the loan to Mrs. Schiffman at September 30, 1998, $3,821, was paid in full on December 31, 1998 . Theodore H. Schiffman's son, Stephen Schiffman, is employed by the Company at an annual salary of $50,000. Stephen Schiffman is the Company's Secretary and an administrator of the Company's Terrapin(TM) line of notebook computer carrying cases. Jerome E. Ball, Chief Executive Officer of the Company, purchased one Unit in the 1997 Private Placement for $25,000. Accordingly, the Company was indebted to Mr. Ball in the amount of $10,000, pursuant to the terms of the 1997 Private Placement. In addition, Mr. Ball purchased an additional $60,000 of Notes issued in the 1997 Private Placement from the Company. All such Notes were converted into an aggregate of 140,000 shares of Common Stock and Private Placement Warrants to purchase 210,000 shares of Common Stock on December 4, 1998. The Private Placement Warrants expired on March 15, 1999 . Mr. Ball agreed, for a period of one year, not to sell or otherwise dispose of securities received upon conversion of the Notes held by him without the Company consent. On December 2, 1998, Michael M. Schiffman, President of the Company, purchased $50,000 of the Notes issued in the 1997 Private Placement from the Company. All such Notes were converted into and aggregate of 100,000 shares of Common Stock and Private Placement Warrants to purchase 150,000 shares of Common Stock on December 4, 1998. The Private Placement Warrants expired on March 15, 1999. Mr. Schiffman agreed, for a period of one year, not to sell or otherwise dispose of securities received upon conversion of the Notes held by him without the Company's consent. On December 2, 1998, Philip B. Kart, Chief Financial Officer of the Company, purchased $20,000 of the Notes issued in the 1997 Private Placement from the Company. All such Notes were converted into an aggregate of 40,000 shares of Common Stock and Private Placement Warrants to purchase 60,000 shares of Common Stock on December 4, 1998. The Private Placement Warrants expired on March 15, 1999. Mr. Kart agreed, for a period of one year, not to sell or otherwise dispose of securities received upon conversion of the Notes held by him without the Company's consent. In July and December 1997, Robert S. Ellin and related investors purchased an aggregate of 5.6 Units in the 1997 Private Placement. On August 11, 1998, Mr. Ellin purchased one half Unit in a privately negotiated transaction for $22,500. -25- On December 2, 1998, (i) Nancy J. Ellin, the wife of Mr. Ellin, purchased for $55,000 principal amount of Notes from the Company which converted into 110,000 shares of Common Stock and Private Placement Warrants to purchase 165,000 shares of Common Stock and (ii) the Robert Ellin Profit Sharing Plan purchased for $45,000 principal amount of Notes from the Company which converted into an aggregate of 90,000 shares of Common Stock and Private Placement Warrants to purchase 135,000 shares of Common Stock. The Private Placements Warrants expired on March 15, 1999 Such investors agreed, for a period of one year, not to sell or otherwise dispose of securities received upon conversion of the Notes held by him and related investors of which he is beneficial owner, without the Company's consent. Mr. Ellin is currently in negotiations with the Company concerning his consulting to the Company; however, the Company and Mr. Ellin have not reached any agreement as to any such consulting agreement and there can be no assurance that any such agreement will be reached. In November 1998, Mr. Ellin received a fee of $40,000 in connection with his recruitment of Jerome E. Ball as the Company's Chief Executive Officer and in December 1999 Mr. Ellin received a payment of $20,000 as a partial payment advance toward the agreement. On September 1, 1995, the Company borrowed $100,000 from Carl Waldman, uncle of Theodore H. Schiffman, for a term of five years pursuant to a promissory note bearing interest at 10% per annum. The note was paid in full fiscal 1999. The Company has incurred indebtedness created in connection with letters of credit extended for the benefit of the Company by a corporation controlled by the spouse of Cheryl Fenster Fishoff. The Company pays such corporation a commission of 5% of the amount of the letters of credit, together with expenses related to opening and collection of such letters of credit, and interest on the open balances thereof at 1.5% over the prime rate of the issuing bank. At September 30, 1999, no indebtedness was outstanding and the Company incurred no interest on open letters of credit. ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 2. PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LITIGATION OR SUCCESSION (a) Agreement dated June 9, 1994, between the Company and Northeast Looseleaf, Inc. and amendment thereto (incorporated herein by reference to Exhibit 6(i) to the Company's Form 10-SB Registration Statement ("Form 10-SB")) (a)(1) Settlement Agreement dated December 27, 1995, between the Company and Northeast Looseleaf, Inc. et al. (Incorporated herein by reference to Exhibit 2(a)(1) to the Company's Form 10-KSB for the fiscal year ended September 30, 1995) (b) Agreement dated as of April 24, 1995 between the Company and Republic Clear-Thru Acquisition Corp. (incorporated herein by reference to Exhibit 1 to the Company's Form 8-K Report dated April 27, 1995) 3. ARTICLES OF INCORPORATION AND BY-LAWS (a) Certificate of Incorporation of the Company as amended (incorporated by reference to Exhibit 2(a) to the Form 10-SB) (b) By-Laws (incorporated by reference to Exhibit 2(b) to the Form 10-SB) -26- (c) Amendment to By-Laws (Article I, Section 2) (incorporated by reference to Exhibit 3(c) to the Company's Registration Statement on Form SB-2 filed November 13, 1995 (Reg. No. 33-99338) (the "1995 SB-2 Registration Statement") (d) Certificate of Amendment of Certificate of Incorporation filed by the New York Department of State on August 22, 1997.(Incorporated by reference to the Company's Annual Report on Form 10-KSB for the period ended September 30, 1997) 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS (a) Form of Subscription Agreement executed in connection with 1997 Private Placement November - December, 1994 (transfer restriction) (incorporated by reference to Exhibit 3(a) to the Form 10-SB) (b) Warrant Agreement dated October 20, 1994 between the Company and Mellon Securities Trust Company, including forms of Class A Warrant and Class B Warrant (incorporated by reference to Exhibit 3(b) to the Form 10-SB) (c) Consulting Agreement dated September 26, 1994 between the Company and CWAI Consultants Corp., including form of Warrant; Amendment thereto dated October 13, 1994 (incorporated by reference to Exhibit 3(c) to the Form 10-SB) (c)(1) Amendment No. 2 to CWAI Consultants Corp. Warrant (incorporated by reference to Exhibit 2 to the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1995) (c)(2) Restated and Amended CWAI Consultants Corp. Warrant dated November 6, 1995 (incorporated by reference to Exhibit 4(c)(2) to the 1995 SB-2 Registration Statement) (c)(3) CWAI Consultants Corp. Warrant dated December 11, 1995, superseding the Restated and Amended Warrant filed as Exhibit (c)(2) (Incorporated herein by reference to Exhibit 4(c)(3) to the Company's Annual Report on Form 10-KSB for the fiscal year each September 30, 1995.) (d) Business Loan Agreement dated November 9, 1989 between Koszegi Industries, Inc. ("Koszegi") and 1st Source Bank ("Bank") (without exhibits) (incorporated by reference to Exhibit 3(d) to the Form 10-SB) (e) Security Agreement dated November 9, 1989 from Koszegi to Bank (incorporated by reference to Exhibit 3(f) to the Form 10-SB) (f) Letter from Bank to Koszegi dated November 9, 1989 (incorporated by reference to Exhibit 3(g) to the Form 10-SB) (g) Subordination of Liens Agreement dated October 30, 1989 between Bank Leumi Trust Company of New York and Bank, with First, Second and Third Amendments thereto (incorporated by reference to Exhibit 3(h) to the Form 10-SB) (h) Real Estate Mortgage and Security Agreement dated September 7, 1990 between Koszegi and Bank (incorporated by reference to Exhibit 3(j) to the Form 10-SB) (i) General Loan Agreement dated August 30, 1991 between Koszegi and Bank (incorporated by reference to Exhibit 3(k) to the Form 10-SB) (j) Amendment thereto dated June 30, 1994 (incorporated by reference to Exhibit 3(l) to the Form 10-SB) -27- (k) Term Promissory Note of Koszegi dated August 30, 1991 to Bank in original principal amount of $400,000 (incorporated by reference to Exhibit 3(m) to the Form 10-SB) (l) Subordination of Debt Agreement dated August 30, 1991 between Koszegi and Bank (incorporated by reference to Exhibit 3(n) to the Form 10-SB) (m) Security Agreement dated August 30, 1991, from Koszegi to Bank (incorporated by reference to Exhibit 3(o) to the Form 10-SB) (n) Continuing Guaranty of Payment dated August 30, 1991, from the Company to Bank (incorporated by reference to Exhibit 3(p) to the Form 10-SB) (o) Term Promissory Note of Koszegi dated June 30, 1994 in principal amount of $200,000 (incorporated by reference to Exhibit 3(q) to the Form 10-SB) (p) Letter of Understanding and Agreement to Pledge dates June 30, 1994 among Koszegi, the Company, Theodore Schiffman and Bank (incorporated by reference to Exhibit 3(r) to the Form 10-SB) (q) First Mortgage Note dated May 9, 1989 of the Company to the Greater New York Savings Bank in the principal amount of $1.2 million (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989) (r) First Mortgage and Security Agreement dated May 9, 1989 of the Company to the Greater New York Savings Bank (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989) (s) Revolving Promissory Note of Koszegi dated May 23, 1995 to Bank in principal amount of $750,000, maturing January 31, 1996 (incorporated by reference to Exhibit l(a) to the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1995) (t) Revolving Promissory Note of Koszegi dated July 3, 1995 to Bank in principal amount of $350,000, maturing January 31, 1996 (incorporated by reference to Exhibit l(b) to the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1995) (u) Term Promissory Note of Koszegi dates June 14, 1995 to Bank in principal amount of $300,000, maturing June 15, 1998 (incorporated by reference to Exhibit l(c) to the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1995) (v) Security Agreement dated June 14, 1995 between the Company and 1st Source Bank (incorporated by reference to Exhibit l(d) to the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1995) (w) Consulting Agreement dates as of February 21, 1995 between the Company and Michael Klein, including form of Warrant (incorporated by reference to Exhibit 3(bb) to the Form 10-SB) (x) Convertible Note of the Company dated as of September 11, 1995, to Cheryl Fenster Fishoff in the principal amount of $400,000 (incorporated by reference to Exhibit 4(x) to the 1995 SB-2 Registration Statement) (y) Convertible Note of the Company dated December 19, 1995, to Cheryl Fenster Fishoff in the principal amount of $157,200 (incorporated by reference to Exhibit 4(y) to the Company's Annual Report on Form 10-KSB for the fiscal year ended September 30, 1995) -28- (z) Revolving Promissory Note of Koszegi dated January 31, 1996 to 1st Source Bank in principal amount of $750,000 maturing March 30, 1996 (incorporated by reference to Exhibit 1(a) the Company's Quarterly Report on Form 10-QSB for the quarter ended December 31, 1995) (aa) Revolving Promissory Note of Koszegi dated January 31, 1996 to 1st Source Bank in principal amount of $350,000 maturing March 30, 1996 (incorporated by reference to Exhibit 1(b) to the Company's Quarterly Report on Form 10-QSB for the period ended December 31, 1995) (bb) Convertible Note of the Company dated as of October 25, 1996, to Cliveden Capital Offshore Fund, Ltd. In the principal amount of $150,000 (incorporated by reference to Exhibit 4(bb) to the Company's Annual Report on Form 10-KSB for the period ended September 30, 1996) (cc) Form of Registration Rights Agreement executed in connection with 1997 Private Placement. (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-3 as filed with the Commission on December 9, 1997) (dd) Form of Convertible Promissory Note executed in connection with 1997 Private Placement (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-3 as filed with the Commission on December 9, 1997) (ee) Form of Warrant executed in connection with 1997 Private Placement. (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-3 as filed with the Commission on December 9, 1997) (ff) Business Loan and Security Agreement dated April 13, 1998 between Forward Industries, Inc., Koszegi Industries, Inc. and Summit Bank (without exhibits).(incorporated by reference to the Company's Current Report on Form 8-K filed with the Commission on May 12, 1998) * Filed herewith 9. VOTING TRUST AGREEMENT - Not applicable 10. MATERIAL CONTRACTS (a) Lease, dated March 28, 1989 between Janice Corson as landlord, and Koszegi Industries, Inc. (formerly KP Industries, Inc.) as tenant, with Guarantee of the Company (incorporated by reference to the Company's Current Report on Form 8-K filed with the Commission on April 11, 1989) (b) Employment Agreement dated October 1, 1994 between the Company and Theodore H. Schiffman (incorporated by reference to Exhibit 6(d) to the Form 10-SB) (c) Employment Agreement dated November 1, 1994 between the Company and Michael Schiffman (incorporated by reference to Exhibit 6(e) to the Form 10-SB) (d) Stock Option Agreement dated October 12, 1994 between the Company and Theodore H. Schiffman (incorporated by reference to Exhibit 6(f) to the Form 10-SB) (e) Stock Option Agreement dated October 12, 1994 between the Company and Michael Schiffman (incorporated by reference to Exhibit 6(g) to the Form 10-SB) (f) Agreement dated January 19, 1994 with Inter-Ocean Industries, Inc. re: letters of credit (incorporated by reference to Exhibit 6(h) to the Form 10-SB) -29- (g) Placement Agent Agreement dated October 20, 1994 between the Company and Brookehill Equities, Inc. (incorporated by reference to Exhibit 6(j) to the Form 10-SB) (h) Consulting Agreement dated October 31, 1989 between HSI Acquisition, Inc. (a subsidiary of the Company since merged into the Company) and Mentel Shemtov (incorporated by reference to Exhibit 6(k) to the Form 10-SB) (i) Lease Termination Agreement dated August 14, 1995 between REA Realty Co. and the Company (incorporated by reference to Exhibit 10(i) to the 1995 SB-2 Registration Statement) (j)(1) Employment Agreement dated October 14, 1996 between the Company and William E. Mooar (incorporated by reference to Exhibit 1 to the Company's Current Report on Form 8-K dated October 14, 1996) (j)(2) Amendment No. 1 to the Employment Agreement between the Company and William Mooar (incorporated by reference to Exhibit 10(j)(2) to the Company's Annual Report on Form 10-KSB for the period ended September 30, 1996) (k) Employment Agreement dated October 1, 1997 between the Company and Theodore H. Schiffman (incorporated by reference to Exhibit 10(k) to the Company's Annual Report on Form 10-KSB for the period ended September 30, 1997) (l) Employment Agreement dated November 1, 1997 between the Company and Michael Schiffman (incorporated by reference to Exhibit 10(l) to the Company's Annual Report on Form 10-KSB for the period ended September 30, 1997) (m) Security Agreement dated September 30, 1997 between Koszegi and Amplaco Group, Inc., ("Amplaco") (incorporated by reference to Exhibit 10(m) to the Company's Annual Report on Form 10-KSB for the period ended September 30, 1997) (n) Subordination Agreement and Assignment executed by Koszegi and delivered to The Bank of New York for the benefit of Amplaco, dated September 30, 1997(incorporated by reference to Exhibit 10(n) to the Company's Annual Report on Form 10-KSB for the period ended September 3, 1997) (o) Agreement of Sublease between Koszegi and Amplaco dated September 30, 1997 (incorporated by reference to Exhibit 10(o) to the Company's Annual Report on Form 10-KSB for the period ended September 30, 1997) (p) License Agreement between Koszegi and Amplaco dated September 30, 1997 (incorporated by reference to Exhibit 10(p) to the Company's Annual Report on Form 10-KSB for the period ended September 30, 1997) (q) Asset Purchase Agreement between Koszegi and Amplaco, dated September 30, 1997 (incorporated by reference to Exhibit 10(q) to the Company's Annual Report on Form 10-KSB for the period ended September 30, 1997) (r) Amendment, dated November 6, 1997 to Warrant Agreement dated as of October 20, 1994 Between the Company and Chase Mellon Shareholder Services (f/k/a Mellon Securities Trust Company) (incorporated by reference to Exhibit 10(r) to the Company's Annual Report on Form 10-KSB for the period ended September 30, 1997) -30- (s) Amendment, dated December 18, 1997 to Warrant Agreement dated as of October 20, 1994 Between the Company and Chase Mellon Shareholder Services (f/k/a Mellon Securities Trust Company) (incorporated by reference to Exhibit 10(s) to the Company's Annual Report on Form 10-KSB for the period ended September 30, 1997) (t) Agreement between the Company, Koszegi and MedCovers, Inc. dated July 31, 1998 regarding contract-manufacturing services to be provided by MedCovers, Inc. and for the purchase of certain assets of Koszegi* (u) Employment Agreement effective as of October 1, 1998 between the Company and Jerome E. Ball.* (v) Consulting Agreement effective as of October 1, 1998 between the Company and Theodore H. Schiffman.* (w) Employment Agreement effective as of October 1, 1998, between the Company and Michael Schiffman.* * Filed herewith 11. STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS - Not required since such computation can be clearly determined from the material contained in this report on Form 10-KSB 13. ANNUAL REPORT TO SECURITY HOLDERS FOR THE LAST FISCAL YEAR, FORM 10-Q OR 10-QSB OR QUARTERLY REPORT TO SECURITY HOLDERS, IF INCORPORATED BY REFERENCE IN THE FILING - Not applicable 16. LETTER ON CHANGE IN CERTIFYING ACCOUNTANT - Incorporated by reference to Exhibit 16.1 to the Company's Current Report on Form 8-K dated June 9, 1997 18. LETTER ON CHANGE IN ACCOUNTING PRINCIPLES - Not applicable 21. SUBSIDIARIES OF THE SMALL BUSINESS ISSUER (incorporated by reference to Exhibit 21 to the Company's Annual Report on Form 10-KSB for the fiscal year ended September 30, 1995) 22. PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO VOTE OF SECURITY HOLDERS - Not applicable 23. CONSENT OF EXPERTS AND COUNSEL - Consent of Patrusky, Mintz & Semel* 24. POWER OF ATTORNEY - Not applicable 28. INFORMATION FROM REPORTS FURNISHED TO STATE INSURANCE REGULATORY AUTHORITIES - Not applicable 99. ADDITIONAL EXHIBITS - Not applicable -31- SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. Dated: December 7, 1999 FORWARD INDUSTRIES, INC. By: /S/ JEROME E. BALL ---------------------- Jerome E. Ball Chief Executive Officer, and Chairman of the Board In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: December 7, 1999 /S/JEROME E. BALL ------------------ Jerome E. Ball Chief Executive Officer, and Chairman of the Board (Principal Executive Officer) December 7, 1999 /S/PHILIP B. KART ----------------- Philip B. Kart Chief Financial Officer and Vice President (Principal Financial Officer and Principal Accounting Officer) December 7, 1999 /S/THEODORE H. SCHIFFMAN ------------------------ Theodore H. Schiffman Director December 7, 1999 /S/MICHAEL SCHIFFMAN -------------------- Michael Schiffman President and Director December 7, 1999 /S/NOAH FLESCHNER ----------------- Noah Fleschner Director December 7, 1999 /S/SAMSON HELFGOTT Samson Helfgott Director -32- EXHIBIT INDEX Page No. 2. PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LITIGATION OR SUCCESSION (a) Agreement dated June 9, 1994, between the Company and Northeast Looseleaf, Inc. and amendment thereto (incorporated herein by reference to Exhibit 6(i) to the Company's Form 10-SB Registration Statement ("Form 10-SB")) (a)(1) Settlement Agreement dated December 27, 1995, between the Company and Northeast Looseleaf, Inc. et al. (Incorporated herein by reference to Exhibit 2(a)(1) to the Company's Form 10-KSB for the fiscal year ended September 30, 1995) (b) Agreement dated as of April 24, 1995 between the Company and Republic Clear- Thru Acquisition Corp. (incorporated herein by reference to Exhibit 1 to the Company's Form 8-K Report dated April 27, 1995) 3. ARTICLES OF INCORPORATION AND BY-LAWS (a) Certificate of Incorporation of the Company as amended (incorporated by reference to Exhibit 2(a) to the Form 10-SB) (b) By-Laws (incorporated by reference to Exhibit 2(b) to the Form 10-SB) (c) Amendment to By-Laws (Article I, Section 2) (incorporated by reference to Exhibit 3(c) to the Company's Registration Statement on Form SB-2 filed November 13, 1995 (Reg. No. 33-99338) (the "1995 SB-2 Registration Statement") (d) Certificate of Amendment of Certificate of Incorporation filed by the New York Department of State on August 22, 1997.* 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS (a) Form of Subscription Agreement executed in connection with 1997 Private Placement November - December, 1994 (transfer restriction) (incorporated by reference to Exhibit 3(a) to the Form 10-SB) (b) Warrant Agreement dated October 20, 1994 between the Company and Mellon Securities Trust Company, including forms of Class A Warrant and Class B Warrant (incorporated by reference to Exhibit 3(b) to the Form 10-SB) (c) Consulting Agreement dated September 26, 1994 between the Company and CWAI Consultants Corp., including form of Warrant; Amendment thereto dated October 13, 1994 (incorporated by reference to Exhibit 3(c) to the Form 10-SB) (c)(1) Amendment No. 2 to CWAI Consultants Corp. Warrant (incorporated by reference to Exhibit 2 to the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1995) (c)(2) Restated and Amended CWAI Consultants Corp. Warrant dated November 6, 1995 (incorporated by reference to Exhibit 4(c)(2) to the 1995 SB-2 Registration Statement) -33- (c)(3) CWAI Consultants Corp. Warrant dated December 11, 1995, superseding the Restated and Amended Warrant filed as Exhibit (c)(2) (Incorporated herein by reference to Exhibit 4(c)(3) to the Company's Annual Report on Form 10-KSB for the fiscal year each September 30, 1995.) (d) Business Loan Agreement dated November 9, 1989 between Koszegi Industries, Inc. ("Koszegi") and 1st Source Bank ("Bank") (without exhibits) (incorporated by reference to Exhibit 3(d) to the Form 10-SB) (e) Security Agreement dated November 9, 1989 from Koszegi to Bank (incorporated by reference to Exhibit 3(f) to the Form 10-SB) (f) Letter from Bank to Koszegi dated November 9, 1989 (incorporated by reference to Exhibit 3(g) to the Form 10-SB) (g) Subordination of Liens Agreement dated October 30, 1989 between Bank Leumi Trust Company of New York and Bank, with First, Second and Third Amendments thereto (incorporated by reference to Exhibit 3(h) to the Form 10-SB) (h) Real Estate Mortgage and Security Agreement dated September 7, 1990 between Koszegi and Bank (incorporated by reference to Exhibit 3(j) to the Form 10-SB) (i) General Loan Agreement dated August 30, 1991 between Koszegi and Bank (incorporated by reference to Exhibit 3(k) to the Form 10-SB) (j) Amendment thereto dated June 30, 1994 (incorporated by reference to Exhibit 3(l) to the Form 10-SB) (k) Term Promissory Note of Koszegi dated August 30, 1991 to Bank in original principal amount of $400,000 (incorporated by reference to Exhibit 3(m) to the Form 10-SB) (l) Subordination of Debt Agreement dated August 30, 1991 between Koszegi and Bank (incorporated by reference to Exhibit 3(n) to the Form 10-SB) (m) Security Agreement dated August 30, 1991, from Koszegi to Bank (incorporated by reference to Exhibit 3(o) to the Form 10-SB) (n) Continuing Guaranty of Payment dated August 30, 1991, from the Company to Bank (incorporated by reference to Exhibit 3(p) to the Form 10-SB) (o) Term Promissory Note of Koszegi dated June 30, 1994 in principal amount of $200,000 (incorporated by reference to Exhibit 3(q) to the Form 10-SB) (p) Letter of Understanding and Agreement to Pledge dates June 30, 1994 among Koszegi, the Company, Theodore Schiff man and Bank (incorporated by reference to Exhibit 3(r) to the Form 10-SB) (q) First Mortgage Note dated May 9, 1989 of the Company to the Greater New York Savings Bank in the principal amount of $1.2 million (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989) (r) First Mortgage and Security Agreement dated May 9, 1989 of the Company to the Greater New York Savings Bank (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989) -34- (s) Revolving Promissory Note of Koszegi dated May 23, 1995 to Bank in principal amount of $750,000, maturing January 31, 1996 (incorporated by reference to Exhibit l(a) to the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1995) (t) Revolving Promissory Note of Koszegi dated July 3, 1995 to Bank in principal amount of $350,000, maturing January 31, 1996 (incorporated by reference to Exhibit l(b) to the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1995) (u) Term Promissory Note of Koszegi dates June 14, 1995 to Bank in principal amount of $300,000, maturing June 15, 1998 (incorporated by reference to Exhibit l(c) to the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1995) (v) Security Agreement dated June 14, 1995 between the Company and 1st Source Bank (incorporated by reference to Exhibit l(d) to the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1995) (w) Consulting Agreement dates as of February 21, 1995 between the Company ant Michael Klein, including form of Warrant (incorporated by reference to Exhibit 3(bb) to the Form 10-SB) (x) Convertible Note of the Company dated as of September 11, 1995, to Cheryl Fenster Fishoff in the principal amount of $400,000 (incorporated by reference to Exhibit 4(x) to the 1995 SB-2 Registration Statement) (y) Convertible Note of the Company dated December 19, 1995, to Cheryl Fenster Fishoff in the principal amount of $157,200 (incorporated by reference to Exhibit 4(y) to the Company's Annual Report on Form 10-KSB for the fiscal year ended September 30, 1995) (z) Revolving Promissory Note of Koszegi dated January 31, 1996 to 1st Source Bank in principal amount of $750,000 maturing March 30, 1996 (incorporated by reference to Exhibit 1(a) the Company's Quarterly Report on Form 10-QSB for the quarter ended December 31, 1995) (aa) Revolving Promissory Note of Koszegi dated January 31, 1996 to 1st Source Bank in principal amount of $350,000 maturing March 30, 1996 (incorporated by reference to Exhibit 1(b) to the Company's Quarterly Report on Form 10-QSB for the period ended December 31, 1995) (bb) Convertible Note of the Company dated as of October 25, 1996, to Cliveden Capital Offshore Fund, Ltd. In the principal amount of $150,000 (incorporated by reference to Exhibit 4(bb) to the Company's Annual Report on Form 10-KSB for the period ended September 30, 1996) (cc) Form of Registration Rights Agreement executed in connection with 1997 Private Placement. (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-3 as filed with the Commission on December 9, 1997) (dd) Form of Convertible Promissory Note executed in connection with 1997 Private Placement (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-3 as filed with the Commission on December 9, 1997) (ee) Form of Warrant executed in connection with 1997 Private Placement. (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-3 as filed with the Commission on December 9, 1997) -35- 9. VOTING TRUST AGREEMENT - Not applicable 10. MATERIAL CONTRACTS (a) Lease, dated March 28, 1989 between Janice Corson as landlord, and Koszegi Industries, Inc. (formerly KP Industries, Inc.) as tenant, with Guarantee of the Company (incorporated by reference to the Company's Current Report on Form 8-K filed with the Commission on April 11, 1989) (b) Employment Agreement dated October 1, 1994 between the Company and Theodore H. Schiffman (incorporated by reference to Exhibit 6(d) to the Form 10-SB) (c) Employment Agreement dated November 1, 1994 between the Company and Michael Schiffman (incorporated by reference to Exhibit 6(e) to the Form 10-SB) (d) Stock Option Agreement dated October 12, 1994 between the Company and Theodore H. Schiffman (incorporated by reference to Exhibit 6(f) to the Form 10-SB) (e) Stock Option Agreement dated October 12, 1994 between the Company and Michael Schiffman (incorporated by reference to Exhibit 6(g) to the Form 10-SB) (f) Agreement dated January 19, 1994 with Inter-Ocean Industries, Inc. re: letters of credit (incorporated by reference to Exhibit 6(h) to the Form 10-SB) (g) Placement Agent Agreement dated October 20, 1994 between the Company and Brookehill Equities, Inc. (incorporated by reference to Exhibit 6(j) to the Form 10-SB) (h) Consulting Agreement dated October 31, 1989 between HSI Acquisition, Inc. (a subsidiary of the Company since merged into the Company) and Mentel Shemtov (incorporated by reference to Exhibit 6(k) to the Form 10-SB) (i) Lease Termination Agreement dated August 14, 1995 between REA Realty Co. and the Company (incorporated by reference to Exhibit 10(i) to the 1995 SB-2 Registration Statement) (j)(1) Employment Agreement dated October 14, 1996 between the Company and William E. Mooar (incorporated by reference to Exhibit 1 to the Company's Current Report on Form 8-K dated October 14, 1996) (j)(2) Amendment No. 1 to the Employment Agreement between the Company and William Mooar (incorporated by reference to Exhibit 10(j)(2) to the Company's Annual Report on Form 10-KSB for the period ended September 30, 1996) (k) Employment Agreement dated October 1, 1997 between the Company and Theodore H. Schiffman* (l) Employment Agreement dated November 1, 1997 between the Company and Michael Schiffman* (m) Security Agreement dated September 30, 1997 between Koszegi and Amplaco Group, Inc., ("Amplaco")* (n) Subordination Agreement and Assignment executed by Koszegi and delivered to The Bank of New York for the benefit of Amplaco, dated September 30, 1997.* -36- (o) Agreement of Sublease between Koszegi and Amplaco dated September 30, 1997* (p) License Agreement between Koszegi and Amplaco dated September 30, 1997* (q) Asset Purchase Agreement between Koszegi and Amplaco, dated September 30, 1997* (r) Amendment, dated November 6, 1997 to Warrent Agreement dated as of October 20, 1994 Between the Company and Chase Mellon Shareholder Services (f/k/a Mellon Securities Trust Company)* (s) Amendment, dated December 18, 1997 to Warrent Agreement dated as of October 20, 1994 Between the Company and Chase Mellon Shareholder Services (f/k/a Mellon Securities Trust Company)* 11. STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS - Not required since such computation can be clearly determined from the material contained in this report on Form 10-KSB 13. ANNUAL REPORT TO SECURITY HOLDERS FOR THE LAST FISCAL YEAR, FORM 10-Q OR 10-QSB OR QUARTERLY REPORT TO SECURITY HOLDERS, IF INCORPORATED BY REFERENCE IN THE FILING - Not applicable 16. LETTER ON CHANGE IN CERTIFYING ACCOUNTANT - Incorporated by reference to Exhibit 16.1 to the Company's Current Report on Form 8-K dated June 9, 1997 18. LETTER ON CHANGE IN ACCOUNTING PRINCIPLES - Not applicable 21. SUBSIDIARIES OF THE SMALL BUSINESS ISSUER (incorporated by reference to Exhibit 21 to the Company's Annual Report on Form 10-KSB for the fiscal year ended September 30, 1995) 22. PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO VOTE OF SECURITY HOLDERS - Not applicable 23. CONSENT OF EXPERTS AND COUNSEL - (a) Consent of Patrusky, Mintz & Semel* (b) Consent of Miller, Ellin & Company* 24. POWER OF ATTORNEY - Not applicable 28. INFORMATION FROM REPORTS FURNISHED TO STATE INSURANCE REGULATORY AUTHORITIES - Not applicable 99. ADDITIONAL EXHIBITS - Not applicable *Filed herewith -37- ITEM 7 - FINANCIAL STATEMENTS FORWARD INDUSTRIES, INC. AND SUBSIDIARIES REPORT ON CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED SEPTEMBER 30, 1999 CONTENTS PAGE INDEPENDENT AUDITORS'REPORT F-2 CONSOLIDATED BALANCE SHEETS F-3 - F-4 CONSOLIDATED STATEMENTS OF OPERATIONS F-5 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME F-6 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY F-7 CONSOLIDATED STATEMENTS OF CASH FLOWS F-8 - F-9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-10 - F-25 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS F-26 EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE F-27 - F-29 F-1 INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS 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 the 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. /S/ PATRUSKY, MINTZ & SEMEL PATRUSKY, MINTZ & SEMEL CERTIFIED PUBLIC ACCOUNTANTS NEW YORK, NEW YORK December 7, 1999 F-2 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1999 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 --------- $9,826,181 ==========
The accompanying notes are an integral part of the consolidated financial statements. F-3 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (CONTINUED) SEPTEMBER 30, 1999 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 7,402,768 Accumulated deficit (2,048,569) Foreign currency adjustment (589) --------- 5,416,475 Less: Cost of shares in treasury 301,169 --------- Total stockholders' equity 5,115,306 --------- $9,826,181 ==========
The accompanying notes are an integral part of the consolidated financial statements. F-4 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, ------------------------- 1999 1998 ---- ---- 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 (71,734) (279,825) 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 -------- ----------- (146,552) 464,024 -------- ----------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 1,507,777 (798,628) PROVISION FOR INCOME TAXES (Note 11) 395,000 280,148 -------- ----------- INCOME (LOSS) FROM BEFORE EXTRAORDINARY ITEM 1,112,777 (1,078,776) EXTRAORDINARY ITEM: Non-cash interest charge from Conversion of promissory notes (net of income tax benefit of $ -0-)Note 14 (277,000) -- -------- ----------- NET INCOME (LOSS) $835,777 ($1,078,776) -------- ----------- NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE (Note 17): Basic: Income (loss) before extraordinary item $.19 $(.23) Extraordinary item (.05) -- ---- ----- $.14 $(.23) ---- ----- Diluted: Income (loss) before extraordinary item Extraordinary item $.19 $(.23) (.05) -- ---- ----- $.14 $(.23) ---- ----- 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 ==== ====
The accompanying notes are an integral part of the consolidated financial statements. F-5 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended SEPTEMBER 30 -------------------------------------- 1999 1998 -------------------------------------- NET INCOME (LOSS) $ 835,777 $(1,078,776) COMPREHENSIVE INCOME ADJUSTMENTS: 17,128 (17,717) ====== ======= COMPREHENSIVE INCOME (LOSS) $ 852,905 $(1,096,493) ========== ===========
The accompanying notes are an integral part of these financial statements F-6 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK ------------ RETAINED EARNINGS FOREIGN NUMBER PAID-IN (ACCUM. CURRENCY TOTAL OF SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENT ----- --------- ------ ------- -------- ---------- YEAR ENDED SEPTEMBER 30, 1998 Balance October 1, 1997 $ 4,228,694 4,303,031 $ 43,030 $ 6,229,347 $(1,805,570) $- Common stock issued in connection with private placement (Note 14) 292,500 585,000 5,850 286,650 -- -- 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 (1,078,776) -- -- -- (1,078,776) -- ----------- --------- ----------- ----------- ----------- ----------- BALANCE - September 30, 1998 $ 3,461,157 4,963,031 $ 49,630 $ 6,551,703 $(2,884,346) $ (17,717) =========== ========= =========== =========== =========== =========== YEAR ENDED SEPTEMBER 30, 1999 BALANCE October 1, 1998 $ 3,461,157 4,963,031 $ 49,630 $ 6,551.703 $(2,884,346) $ (17,717) Common stock issued in connection with conversion of notes payable $ 554,000 1,108,000 $ 11,080 $ 542,920 -- -- Offering costs of conversion debt to equity (11,950) -- -- (11,950) -- -- Extraordinary charge related to note conversion(Note 14) 277,000 -- -- 277,000 -- -- Exercise of Class B Warrants 107,750 215,500 2,155 105,595 -- -- Shares repurchased in open-market transactions (63,056) -- -- -- -- -- Reversal of expense for Warrants issued for services which lapsed (Note 14) (62,500) -- -- (62,500) -- -- Foreign currency transaction adjustment 17,128 -- -- -- -- 17,128 Net earnings 835,777 -- -- -- 835,777 -- ----------- --------- ----------- ----------- ----------- ----------- BALANCE September 30, 1999 $ 5,115,306 6,286,531 $ 62,865 $ 7,402,768 $(2,048,569) $ (589) =========== ========= =========== =========== =========== =========== TREASURY STOCK -------------- NUMBER OF SHARES AMOUNT --------- ------ Balance October 1, 1997 (164,890) $ (238,113) Common stock issued in connection with private placement (Note 14) -- -- Deferred offering costs -- -- Exercise of options -- -- Issuance of warrants for services rendered (Note 14) -- -- Foreign currency translation adjustment -- -- Net loss -- -- -------- ----------- BALANCE - September 30, 1998 (164,890) $ (238,113) ======== =========== BALANCE October 1, 1998 (164,890) $ (238,113) Common stock issued in connection with conversion of notes payable -- -- Offering costs of conversion debt to equity -- -- Extraordinary charge related to note conversion(Note 14) -- -- Exercise of Class B Warrants -- -- Shares repurchased in open-market transactions (20,000) (63,056) Reversal of expense for Warrants issued for services which lapsed (Note 14) -- -- Foreign currency transaction adjustment -- -- Net earnings -- -- -------- ----------- BALANCE September 30, 1999 (184,890) $ (301,169) ======== ===========
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-7 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, ------------------------- 1999 1998 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 835,777 $(1,078,776) 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 (68,299) (668,962) 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) Purchase of Treasury Shares (63,056) -- ------- -------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (12,503) 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 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 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. F-8 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED SEPTEMBER 30, ------------------------- 1999 1998 ---- ---- 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 --
The accompanying notes are an integral part of the consolidated financial statements. F-9 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. 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-10 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. F-11 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) TRANSLATION OF FOREIGN CURRENCY The foreign currency financial statements of divisions operating outside the United States are translated in accordance with the requirements of the Financial Accounting Standards Board. All income and expense accounts are translated at average exchange rates; assets and liabilities, at current exchange rates; and stockholders' equity at historical exchange rates. INCOME TAXES The Company utilized SFAS No. 109, "Accounting for Income Taxes," which requires the use of the liability method of accounting for income taxes. The liability method measures deferred income taxes by applying statutory rates in effect at the balance sheet date to the differences between the tax base of assets and liabilities and their reported amounts in the financial statements. The resulting deferred tax assets or liabilities are adjusted to reflect changes in tax laws as they occur. 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. F-12 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 NOTE 2 - RESTRUCTURING CHARGE IN FISCAL 1998 (CONTINUED) 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, markdown of property and equipment to estimated realizable value $202,000, factory related expenses incurred during the shutdown $285,000 and other costs $50,000. NOTE 3 - INVENTORIES Inventories at September 30, 1999 are comprised of the following: Finished goods $957,402 Raw materials and supplies 34,662 -------- $992,064 ======== NOTE 4 - NOTES RECEIVABLE Notes receivable consist of the following at September 30, 1999: 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 Maturities of notes receivable are as follows:
FISCAL YEAR ENDING SEPTEMBER 30, AMOUNT ------------- ------ 2000 $227,858 2001 126,284 ------- $354,142 ========
Interest income on the above notes receivable amounted to $57,051 and $105,211 for the years ended September 30, 1999 and 1998, respectively. F-13 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 NOTE 5 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at September 30, 1999 consists of the following:
ESTIMATED USEFUL LIVES ---------------------- 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 ======== * 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: 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 =======
F-14 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 NOTE 6 - NOTES AND LOANS RECEIVABLE - OFFICERS (CONTINUED) Maturities of notes and loans receivable - officers are as follows:
FISCAL YEAR ENDING SEPTEMBER 30, ------------- 2000 $28,490 2001 18,490 2002 18,490 2003 18,491 ------ $83,961 ======= 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: Non-trade receivables $ 298,800 Prepaid insurance 116,832 Sundry others 25,370 ------ $ 441,002 =========
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. F-15 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 NOTE 8 - DEBT (CONTINUED) 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. 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: 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 ==========
F-16 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 NOTE 11- INCOME TAXES The components of the deferred tax assets and liabilities at September 30, 1999 are as follows: 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 ========== At September 30, 1999 a valuation allowance is provided as it is uncertain if certain deferred tax assets will be fully utilized. Provision (credit) for income taxes for the years ended September 30, consists of the following:
1998 1999 -------- ------- 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 Extraordinary Item - - -------- ------- $395,000 $280,148 ======== ========
F-17 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 NOTE 11 - INCOME TAXES (CONTINUED) Reconciliation of statutory rate to effective income tax rate is as follows:
YEARS ENDED SEPTEMBER 30, ------------------------- 1999 1998 ---- ---- 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% ==== ====
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. F-18 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 NOTE 12 - COMMITMENTS (CONTINUED) Minimum rental commitments under such leases for future fiscal years are summarized below:
YEARS ENDED SEPTEMBER 30, ------------------------- 2000 $186,128 2001 63,528 2002 47,646 -------- $297,302 --------
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 agreement was terminated and the Company entered into a consulting agreement with the officer. 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, 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 price of $1.88 (vested on the date sales reached $16,000,000) and 200,000 at $3.25 (vested on the date sales reached $18,500,00). F-19 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 NOTE 12 - COMMITMENTS (CONTINUED) 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). 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. F-20 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 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 the conversion of its Notes into Common Stock, the Company recorded a non-cash, extraordinary charge against earnings of $277,000. This amount, recorded as interest expense, reflects the difference between the average bid and asked price per share of the Company's stock on December 4, 1998 (the date on which such conversion occurred) on the Nasdaq SmallCap Market, $.75, and, the price at which the Company converted such shares, $.50, aggregated by the total shares issued. No tax benefit has been recorded in connection with this interest charge as it is not deductible for federal income taxes. F-21 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 NOTE 14 - STOCKHOLDER'S EQUITY (CONTINUED) WARRANTS In February 1995, the Company issued warrants to a financial consultant to purchase 100,000 shares at $2.00 per share pursuant to the terms of a four year agreement. Based on a market valuation of $3.00 per share, the expense to be recognized over the life of the agreement is $100,000. During the year ended September 30, 1996, 12,500 shares were purchased. In 1997 and 1998, no shares were purchased. For the year ended September 30, 1998 , the amount charged to operations and credited to paid-in capital was $9,730. The unexercised warrants expired on January 31, 1999 and operations for the year ended September 30, 1999 were credited for 62,500 representing the reversal of the related expense. In December 1994, the Company issued 500,000 units which included one Class A warrant and one Class B warrant under the terms of a private placement. The terms of the warrants are as follows:
NUMBER OF SHARES EXERCISE PER WARRANT PRICE EXPIRATION DATE ----------- ----- --------------- Class A 1 $3.50 December 31, 1996 Class B 1 .50* September 30, 1999
*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:
OUTSTANDING EXERCISE EXPIRATION ISSUE WARRANTS PRICE DATE VESTED ----- -------- ----- ---- ------ 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 =======
*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. F-22 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED) 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, 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:
1999 1998 ------------------------- --------------------------- Exercise Exercise SHARES Prices SHARES PRICES ------ ------ ------ ------ 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 ========= =========
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. F-23 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 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. The following table presents the carrying amounts and fair values at September 30, for the following:
1999 1998 ---- ---- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------ ----- ------ ----- Notes receivable $354,142 $358.150 $696,598 $687,257 Notes and loans receivable -officers 83,961 66,429 116,273 90,658
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:
1999 1998 ---- ---- AS REPORTED PRO FORMA AS REPORTED PRO FORMA ----------- --------- ----------- --------- Net income (loss) $1,112,777 $733,460 $(1,078,776) $(1,090,969) Income (loss) per share $ .19 .13 (.23) (.23)
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-24 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 NOTE 18 - 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. F-25 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- -------- -------- -------- -------- BALANCE AT ADDITIONS BALANCE AT BEGINNING CHARGED TO END OF OF YEAR OPERATIONS DEDUCTIONS YEAR ------- ---------- ---------- ---- DESCRIPTION ----------- 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
F-26 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE
YEARS ENDED SEPTEMBER 30, ------------------------- 1999 1998 ---- ---- NUMERATOR Income (loss) from continuing operations: Income (loss) from discontinued operations $1,112,777 $(1,078,776) Preferred dividends - - ---------- ----------- 1,112,777 BASIC (1,078,776) Impact of potential common shares: Convertible debt - N/A --------- --------- $1,112,777 DILUTED ($1,078,776) ========== =========== Loss from extraordinary item (277,000) - ========== =========== 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 Income from continuing operations $.19 $(.23) extraordinary item (.05) - ----- ------ $.14 $(.23) ==== ===== DILUTED EPS Income from continuing operations $.19 $(.23) extraordinary item (.05) - ----- ------ $.14 $(.23) ==== =====
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-27 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE CALCULATIONS
YEARS ENDED SEPTEMBER 30 ------------------------ 1999 1998 ---- ---- 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 ========= =========
F-28 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE COMPUTATION OF WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
YEAR ENDED SEPTEMBER 30, 1999 WEIGHTED DATES SHARES FRACTION OF AVERAGE OUTSTANDING OUTSTANDING PERIOD SHARES ----------- ----------- ------ ------ 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 ========= YEAR ENDED SEPTEMBER 30, 1998 PERIOD WEIGHTED DATES SHARES HELD IN AVERAGE OUTSTANDING OUTSTANDING DAYS SHARES ----------- ----------- ---- ------ 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 =========
F-29 EX-23 2 EXHIBIT 23 Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation in Form 10-KSB of Forward Industries. Inc. our report dated December 7, 1999, relating to the financial statements of the Company for the year ended September 30, 1999. We also consent to the reference to us under the heading "Experts". /s/ Patrusky Mintz & Semel CERTIFIED PUBLIC ACCOUNTANTS December 15, 1999 EX-27 3 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S AUDITED BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND AUDITED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS THEN ENDED. 12-MOS SEP-30-1999 OCT-01-1999 SEP-30-1999 1,210,762 0 4,872,063 133,800 992,064 8,141,072 659,315 166,888 9,826,181 4,710,875 0 0 0 62,865 5,052,441 9,826,181 20,553,192 20,553,192 14,307,809 14,307,809 4,591,054 0 71,735 1,507,778 395,000 112,778 0 (277,000) 0 835,778 0.14 0.14
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