UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) Quarterly report under section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended June 30,1998.
or
( ) Transition report under section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from ___________to_____________.
Commission File Number: 0-6669.
---------
Forward Industries, INC.
---------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-1950672
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 Post Avenue Westbury, NY 11590
- -------------------------------------- -----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (516) 338-0700
----------------
275 West Hempstead Avenue Hempstead, NY 11552
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
--- ---
As of August 11, 1998, 4,798,141 shares of the issuer's common stock were
outstanding.
Transitional Small Business Disclosure Format:
Yes No X
--- ---
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
FORM 10-QSB
NINE MONTHS ENDED JUNE 30, 1998
CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Consolidated Balance Sheets
as of June 30, 1998 (Unaudited)
and September 30, 1997 3
Consolidated Statements of Income
(Unaudited) for the Nine Months
Ended June 30, 1998 and 1997 5
Consolidated Statements of Cash Flows
(Unaudited) for the Three Months
Ended June 30, 1998 and 1997 6
Notes to Form 10-QSB (Unaudited) 8
Item 2. Management's Discussions and Analysis 14
PART II. OTHER INFORMATION 18
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
2
PART I. ITEM 1. FINANCIAL STATEMENTS
-----------------------------
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, September 30,
1998 1997 *
------------ ---------------
ASSETS (Unaudited) (Restated)
CURRENT ASSETS:
Cash and cash equivalents $ 993,976 $ 1,365,198
Accounts receivable, less allowance for doubtful
accounts of $91,333 and $91,333 1,920,666 2,888,593
Due on sale of division (net of estimated expenses) --- 572,785
Inventories, net 1,548,991 935,012
Prepaid expenses and other current assets 267,404 161,402
Notes and loans receivable - current portion 324,554 276,686
Notes and loans receivable - officers - current portion 57,500 63,821
Deferred income taxes 690,000 690,000
------- -------
Total current assets 5,803,091 6,953,497
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, net 625,019 606,002
------- -------
OTHER ASSETS:
Deferrred income taxes 1,016,657 1,320,475
Note receivable - net of current portion 427,733 615,338
Notes and loans receivable - officers - net of
current portion 69,106 105,535
Deferred debt costs 102,947 98,884
Other assets 149,664 112,248
Building held for sale or lease --- 129,253
Deferred offering costs --- 66,942
---------- -----------
1,766,107 2,448,675
--------- ---------
$ 8,194,217 $ 10,008,174
============ ============
* The balance sheet at September 30, 1997 is derived from the audited
financial statements of that date.
The accompanying notes are an integral part of these financial statements.
3
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, September 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 *
- ------------------------------------ ------------ --------------
(Unaudited) (Restated)
CURRENT LIABILITIES:
Acceptances and notes payable $ 858,536 $ 1,375,105
Accounts payable 1,203,429 1,936,899
Current maturities of mortgage payable --- 16,991
Current maturities of long-term debt 563,812 234,697
Private placement deposits --- 185,000
Accrued expenses and other current liablilites 491,372 486,802
------- -------
Total current liabilities 3,117,149 4,235,494
--------- ---------
LONG-TERM LIABLITIES:
Long-term debt, net of current maturities --- 359,000
Notes payable - related parties 58,700 88,700
Mortgage payable, net of current maturities --- 1,096,286
--------- ---------
58,700 1,543,986
--------- ---------
Total liabilities 3,175,849 5,779,480
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Preferred stock, 4,000,000 authorized shares par
value $.01; none issued --- ---
Common stock, 40,000,000 authorized shares, par value
$.01; issued 4,963,031 shares at June 30, 1998
and 4,303,031 shares at September 30, 1997
(including 164,890 held in treasury) 49,630 43,030
Paid-in capital 6,556,690 6,229,347
Deficit (1,349,839) (1,805,570)
----------- -----------
5,256,481 4,466,807
Less: Cost of shares in treasury 238,113 238,113
----------- -----------
Total stockholders' equity 5,018,368 4,228,694
----------- -----------
$ 8,194,217 $ 10,008,174
============ ============
* The balance sheet at September 30, 1997 is derived from the audited
financial statements of that date.
The accompanying notes are an integral part of these financial statements.
4
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------- ----------------------------
1998 1997 1998 1997
--------- ------------ ------------- ------------
NET SALES $ 3,066,961 $ 3,406,688 $ 9,265,256 $ 9,008,454
COST OF GOODS SOLD 2,122,064 2,183,838 6,285,992 5,851,646
--------- --------- --------- ---------
GROSS PROFIT 944,897 1,222,850 2,979,264 3,156,808
------- --------- --------- -----------
OPERATING EXPENSES:
Distribution 12,972 8,658 21,292 30.282
Selling 308,681 337,209 966,858 1.052,095
General and administration 460,070 571,453 1,604,345 1,304,672
------- ------- --------- ---------
781,723 917,320 2,592,495 2,387,049
------- ------- --------- ---------
INCOME FROM OPERATIONS 163,174 305,530 386,769 769,759
------- ------- ------- -------
OTHER INCOME (DEDUCTIONS):
Interest expense (75,891) (26,354) (227,447) (93,398)
Interest expense - related parties (9,482) (8,876) (9,482) (36,317)
Interest income 46,547 9,177 115,053 27,972
Rental income - net --- (29,947) (60,730) (106,158)
Other income(loss) - net (46,985) 69,490 555,386 130,834
-------- ------ ------- -------
(85,811) 13,490 372,780 (77,067)
-------- ------ ------- --------
INCOME BEFORE PROVISION
FOR INCOME TAXES 77,363 319,020 759,549 692,692
PROVISION FOR INCOME TAXES 30,945 133,341 303,818 292,553
------ ---------- ------- -------
INCOME FROM CONTINUING OPERATIONS 46,418 185,679 455,731 400,139
---------- ------- -------
DISCONTINUED OPERATIONS:
Loss from discontinued operations,
net of income tax benefits of
$-0-, ($90,744), $-0- and ($209,317) --- (125,314) --- (289,056)
------------ ------------ ------------ -------------
NET INCOME $ 46,418 $ 60,365 $ 455,731 $ 111,083
============ ============ ============ =============
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE:
Basic:
Income from continuing operations $ 0.010 $ 0.058 $ 0.101 $ 0.134
Discontinued operations --- (0.039) --- (0.097)
---------- ------- ---------- -------
$ 0.010 $ 0.019 $ 0.101 $ 0.037
======= ======== ======= =======
Diluted:
Income from continuing operations $ 0.009 $ 0.045 $ 0.080 $ 0.124
Discontinued operations --- (0.030) --- (0.088)
---------- ------- ---------- -------
$ 0.009 $ 0.015 $ 0.080 $ 0.036
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 4,723,141 3,226,141 4,528,141 2,975,427
========= ========= ========= =========
DIVIDENDS NONE NONE NONE NONE
The accompanying notes are an integral part of these financial statements.
5
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
June 30,
----------------------------------
1998 1997
----------- ------------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $455,731 $ 111,083
Adjustments to reconcile net income to net cash
provided by (used in) continuing operations:
Loss from discontinued operations --- 289,059
Gain on sales of property and equipment (593,076) ---
Depreciation and amortization 85,484 103,885
Amortization of deferred debt costs 89,406 ---
Deferred taxes 303,818 77,728
Non-cash compensation 51,287 18,750
Changes in assets and liabilities:
Accounts receivable 967,927 359,549
Inventories (613,979) (289,006)
Prepaid expenses and other current assets (106,002) (36,787)
Other assets (37,416) (37,427)
Accounts payable (733,470) (340,769)
Accrued expenses and other current liabilities 4,570 (178,762)
Other liabilities --- (22,500)
-------- ----------
Net cash (used in) provided by continuing operations (125,720) (54,743)
--------- --------
Net cash provided by discontinued operations:
Loss from discontinued operations --- (289,059)
Depreciation and amortization --- 13,783
Discontinued operations - net --- 312,335
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (125,720) 91,802
-------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of property 643,830 ---
Proceeds from notes and loans receivable 694,737 283,997
Proceeds from collections from officers 42,750 48,894
Purchases of property, plant and equipment (104,500) (41,484)
--------- --------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 1,276,817 291,407
--------- -------
The accompanying notes are an integral part of the consolidated
financial statements.
6
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
Nine Months Ended
June 30,
-------------------------------------
1998 1997
------------- ------------
(Restated)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) short-term borrowings $ (516,569) $ 311,962
Proceeds from long-term notes 10,000 110,000
Payments of long-term notes (225,001) (152,720)
Payments of mortgage (1,057,748) (11,217)
Payments of notes payable - related parties (30,000) (2,250)
Proceeds from private placement deposits --- 522,500
Proceeds from issuances of stock 414,000 167,000
Deferred offering costs (23,532) (176,102)
Deferred debt costs (93,469) (117,401)
-------- --------
NET CASH (USED IN)PROVIDED BY FINANCING ACTIVITIES (1,522,319) 651,772
----------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS (371,222) 786,021
CASH AND CASH EQUIVALENTS - beginning 1,365,198 208,214
--------- -------
CASH AND CASH EQUIVALENTS - ending $ 993,976 $ 994,235
======= ==========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 77,503 $ 230,380
Income taxes 10,422 529
SCHEDULE OF NON-CASH ACTIVITES:
Forgiveness of mortgage debt 55,529 ---
Offset of deferred offering costs to paid in capital 90,474 ---
Warrants issued for services rendered 10,417 18,750
Conversion of long-term debt into common stock --- 100,000
Conversion of private placement deposits
into long-term debt 185,000 ---
Conversion of amounts due from sale of business
to notes receivable 97,785 ---
The accompanying notes are an integral part of the consolidated
financial statements.
7
FORWARD INDUSTRIES, INC.AND SUBSIDAIRIES
NOTES TO FORM 10-QSB
NINE MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
---------------------
The information in this Form 10-QSB includes the results of operations of
Forward Industries, Inc. ("the Company") and its wholly-owned subsidiary,
Koszegi Industries, Inc. ("Koszegi"), for the periods ended June 30, 1998
and 1997. The data is unaudited, but includes all adjustments including the
elimination of intercompany accounts and transactions which are, in the
opinion of management, necessary for a fair presentation of the interim
periods presented.
The accounting policies utilized in the preparation of this Form 10-QSB are
the same as those set forth in the Company's Annual Report on Form 10-KSB
at September 30, 1997 and should be read in conjunction with the
disclosures presented therein.
Certain prior period balances have been reclassified to conform to the
current period classification.
All information in this Form 10-QSB has been adjusted to give effect to a
one-for-two reverse stock split, as declared by the Board of Directors, of
the Company's issued and outstanding common stock, par value $.01 per
share, effected on December 23, 1997.
This Report may contain forward-looking statements which involve certain
risks and uncertainties. Important factors could arise which could cause
the Company's operating results to differ materially from those contained
in any forward looking statement.
2. EARNINGS PER SHARE
------------------
Earnings per share are based on the weighted average number of shares
outstanding during each period presented. The Company has adopted FAS 128,
"Earnings Per Share" and has restated prior periods to comply with the
provisions of this pronouncement.
3. NEW REVOLVING CREDIT AGREEMENT ESTABLISHED
------------------------------------------
In April 1998, the Company completed a credit facility with a new bank
which provides for a maximum line of credit for working capital of $4.5
million, including letters of credit. Borrowing availability is determined
by a formula of accounts receivable and inventory. The interest rate on the
borrowings 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. An additional $500,000 credit line is
available for financing equipment. In April 1998, the Company paid to its
prior bank approximately $937,000, which represented all amounts owed under
its former credit facility. The former credit facility had a maximum
availability of $1.1 million and an interest rate in effect from time to
time of the prime rate plus 1 1/2%. At June 30, 1998 amounts outstanding
under the new credit facility were $858,500 (the interest rate in effect
was 9.25%). Amounts incurred in connection with establishing the credit
line are being amortized over twelve months and included in interest
expense. In addition, at June 30, 1998 the Company was contingently liable
under unused letters of credit in the amount of $591,200.
8
4. INVENTORY
---------
Inventory consists of the following:
June 30, 1998 September 30, 1997
--------------- ------------------
(Unaudited)
Raw materials $ 224,080 $ 682,545
Work in process 58,605 99,164
Finished goods 1,266,306 153,303
------------ -------
$ 1,548,991 $ 935,012
========= =======
5. SALE OF CERTAIN ASSETS
----------------------
On September 30, 1997, Koszegi, a wholly-owned subsidiary of the Company,
sold certain of its assets, consisting primarily of inventory and equipment
relating to its Advertising Specialties division, to Amplaco Group, Inc.
("Amplaco"). In addition, Amplaco assumed certain liabilities of Koszegi,
including a portion of Koszegi's lease obligations with respect to its
manufacturing obligations in South Bend, Indiana.
The selling price was $1,350,000 (subject to certain adjustments discussed
below) and was received as follows:
o $500,000 in cash. (Received as follows: $25,000 received in September
1997 and $475,000 received in October 1997.)
o The receipt of a non-interest bearing secured promissory note for
$850,000.
In addition, the selling price was subject to the value of inventory. If
the value of the inventory as of the closing date was less than or greater
than $400,000, then the purchase price was to be adjusted on a dollar for
dollar basis (the "Inventory Adjustment"), subject to negotiation. Based on
the physical count taken on the closing date, and the reconciliation
between the parties of those items which Amplaco acquired, the Company
received a second, secured non-interest bearing promissory note in the
amount of $125,000, which was subsequently renegotiated to $95,000. Both
the original and second note are payable monthly over 36 months and 33
months, respectively, and have been recorded at their imputed values in the
accompanying statements.
6. SALE OF BUILDING
----------------
In December 1997, the Company sold a building for $830,000 and recognized a
profit of approximately $574,000. Such profit is included in other income
in the consolidated statement of income.
7. SALE OF CERTAIN PRODUCTION ASSETS AND RESTRUCTURING CHARGE
----------------------------------------------------------
In August 1998, the Company entered into an agreement to sell certain of
Koszegi's production equipment to Medcovers, Inc. of Raleigh, North
Carolina ("Medcovers"), and to provide production personnel for quality
assurance, in order to establish an alternate location of production for
Koszegi's customer orders which are still manufactured in the United
States. The majority of Koszegi's orders are now produced overseas under
the supervision of Koszegi Asia Ltd., a wholly-owned subsidiary of the
Company. As a result, the Company's South Bend, Indiana plant has been
operating at significantly less than capacity. In connection with that
agreement, the Company announced that it would not renew the lease for its
production facility in South Bend, Indiana, upon its expiration in
February 1999. Thereafter, those customer orders which require domestic
manufacture, will be produced under the cooperative production arrangement
with Medcovers. The Company is currently analyzing all of the associated
costs of this restructuring, which will include severance payments and
other employee related benefit expenses, travel costs, equipment and
inventory relocation, the write-off of certain leasehold improvements and
others. A restructuring charge will be included in the Company's fourth
quarter results; however the Company believes that this plan should reduce
its operating expenses thereafter.
9
PART I. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Financial Statements and the notes thereto appearing elsewhere in
this Report. This Report contains statements which constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. The Company cautions that forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those in the forward-looking
statements as a result of various factors.
The following discussion and analysis compares the results of the
Company's continuing operations for the three and nine months ended June 30,
1998, and the three and nine months ended June 30, 1997. The information and
comparative data presented herein excludes the Company's advertising specialties
division, which was divested effective September 30, 1997.
On January 13, 1997, the board of directors of the Company 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.
THREE MONTHS ENDED JUNE 30, 1998 (THE "1998 QUARTER") COMPARED TO THREE MONTHS
ENDED JUNE 30, 1997 (THE "1997 QUARTER").
Income in the 1998 Quarter of $46,400 was relatively comparable to
$60,400 in the 1997 Quarter. However, income from continuing operations
decreased by $139,300 as described below. Basic earnings per share from
continued operations decreased from $.058 in the 1997 Quarter to $0.010 in the
1998 Quarter, while diluted earnings per share from continuing operations
decreased from $0.045 in the 1997 Quarter to $0.009 in the 1998 Quarter.
REVENUES.
- ---------
Net sales decreased $339,700 (10%) to $3,067,000 in the 1998 Quarter,
from $3,406,700 in the 1997 Quarter. The decrease is primarily attributable to
the Company's Terrapin computer case business, while the Company's Custom case
product line sales have remained relatively comparable to the 1997 Quarter.
OPERATING INCOME.
- -----------------
Consolidated income from continuing operations decreased by $139,300 to
a profit of $46,400 in the 1998 Quarter, from $185,700 in the 1997 Quarter. The
decrease relates primarily to sales and gross profit decreases, which were
offset in part by decreased general and administrative expenses, as described
below. Gross profit decreased $278,000 to $944,900 in the 1998 Quarter from
$1,222,900 in the 1997 Quarter, and the gross margin percentage decreased from
36% to 31%. Higher Terrapin case sales during the 1997 Quarter, which carried
higher margins at that time, resulted in an overall higher gross margin in that
quarter. Terrapin computer case sales have not met expectations in 1998, as
competitive pricing and the cost of retail distribution have effected operating
results.
Selling expenses decreased $28,300 (8%) from $337,200 in the 1997
Quarter to $308,900 in the 1998 Quarter, but the ratio of selling expenses to
net sales was unchanged at 10% in both of the Quarterly periods.
General and administrative expenses decreased as a percent of net sales,
to 15% in the 1998 Quarter from 17% in the 1997 Quarter despite a slightly lower
sales volume. The dollar amount of expenses decreased $111,400 (20%) to $460,100
in the 1998 Quarter from $571,900 in the 1997 Quarter. The decrease reflects the
Company's efforts to reduce its general and administrative expenses, and the
current quarter decreases are primarily related to reductions in professional
fees, bank fees, and computer expenses, which were offset in part by higher
travel expenses to suppliers overseas, and to the Company's South Bend, Indiana
production facility.
In August, 1998 the Company entered into an agreement to sell certain of
Koszegi's production equipment to Medcovers, Inc. of Raleigh, North Carolina
("Medcovers"), and to provide production personnel for quality assurance, in
order to establish an alternate location of production for Koszegi's customer
orders which are still manufactured in the United States. The majority of
Koszegi's orders are now produced overseas under the supervision of Koszegi Asia
Ltd and as a result, the Company's South Bend plant has been operating at
significantly less than capacity. In connection with that agreement, the Company
announced that it would not renew the lease for its production facility in South
Bend, Indiana, upon its expiration in February, 1999. Thereafter, those customer
orders which require domestic manufacture, will be produced under the
cooperative production arrangement with Medcovers. The Company is currently
analyzing all of the associated costs of this restructuring, which will include
severance payments and other employee related benefit expenses, travel costs,
equipment and inventory relocation, the write-off of certain leasehold
improvements and others. A restructuring charge will be included
10
in the Company's fourth quarter results; however the Company believes that this
plan should reduce its operating expenses thereafter.
OTHER INCOME (DEDUCTIONS).
- --------------------------
Total interest expenses increased by $50,200 to $85,400 in the 1998
Period from $35,200 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 the
Company's new bank credit facility, which are being amortized over the one year
term and are included in interest income.
The Company's rental building in Brooklyn, New York was partially leased
during the 1997 Period and was sold in December 1997. [See discussion below.] As
a result, rental income - net decreased from a loss of ($29,900) in the 1997
Period to zero in the 1998 Period.
Interest and other income - net decreased $78,700 to zero in the 1998
Period from the 1997 Period. The decrease is primarily related to additional
negotiations and accounting adjustments relating to the sale of the Advertising
Specialties business which reduced the gain on the sale by $30,600 in the
current quarter.
INCOME TAXES.
- -------------
The provision for income taxes decreased by $102,400 due to a $241,600
decrease in profit in the 1998 Quarter from the comparable period in 1997
Quarter. The effective tax rates for the 1998 and 1997 Period were 40% and 42%
respectively.
NINE MONTHS ENDED JUNE 30, 1998 (THE "1998 PERIOD") COMPARED WITH NINE MONTHS
ENDED JUNE 30, 1997 (THE "1997 PERIOD").
Income in the 1998 Period of $455,700 increased significantly from the
net profit of $111,100 in the 1997 Period. The increase in the 1998 Period is
primarily related to a non-recurring sale of the Company's building in Brooklyn,
New York, which amounted to $344,500, net of taxes. Basic earnings per share
increased from $0.037 in the 1997 Period to $0.101 in the 1998 Period, while
diluted earnings per share increased from $0.03 in the 1997 period to $0.08 in
the 1998 period.
REVENUES.
- ---------
Net sales increased $256,800 (3%) to $9,265,300 in the 1998 Period, from
$9,008,500 in the 1997 Period. The Company's retail Terrapin(R) line accounted
for a decrease of approximately $448,000 while Custom case sales increased by
$705,000 (9%). 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 been weaker than the prior year. The Company is working to improve
sales of its computer case product line but market competition and the costs
associated with retail sales has negatively impacted both sales and gross
margins. Higher custom case sales reflect increased demand primarily from one of
the Company's major customers, as well as selected others, including some new
accounts.
OPERATING INCOME.
- -----------------
Consolidated income from continuing operations before tax increased by
$66,800 to a profit of $759,500 in the 1998 Period, up from $692,700 in the 1997
Period, relating primarily to the sale of property described above, which was
partially offset by decreased gross margins. Gross profit decreased to
$2,979,300 in the 1998 Period from $3,158,800 in the 1997 Period, a decrease of
$179,500. The gross margin percent decreased by 3 percentage points to 32% in
the 1998 Period from 35% in the 1997 Period. The decrease is largely
attributable to the Terrapin business, described above.
Selling expenses decreased $85,200 (6%) from $1,052,100 in the 1997
Period to $966,900 in the 1998 Period. In the 1998 Period, the ratio of selling
expenses to net sales was 11%, down from 12% in the 1997 Period. The decrease in
selling expenses in the 1998 Period was primarily the result of a decrease in
advertising expenditures, partially offset by increased travel expense.
11
General and administrative expenses, as presented, increased as a
percent of net sales, from 14% in the 1997 Period to 17% in the 1998 Period,
while the amount, as presented, increased $299,600 (23%) to $1,604,300 in the
1998 Period from $1,304,700 in the 1997 Period. The increase in general and
administrative expenses is attributable 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 in general and administrative expenses. As a result,
the 1998 Period numbers appear to increase substantially when in fact the
absolute dollar amounts incurred by the Company are relatively unchanged. In the
current fiscal quarter the Company has reduced certain general and
administrative expenses, as discussed above.
OTHER INCOME (DEDUCTIONS).
- --------------------------
Total interest expenses increased by $107,200 (83%) to $236,900 in the
1998 Period from $129,700 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 the
Company's new bank credit line which are included in interest income and
amortized over one year.
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 $511,600 in the 1998 Period
from the 1997 Period resulting primarily from the sale of property owned by the
Company, in Brooklyn, New York, which was sold in December, 1997. The Company
recorded a pretax gain on this sale of approximately $574,200.
INCOME TAXES.
- -------------
The provision for income taxes increased by $11,200 due to a $66,800
increase in profit in the 1998 Period from the comparable period in 1997 Period.
The effective tax rates for the 1998 and 1997 Period were 40% and 42%
respectively.
LIQUIDITY AND CAPITAL RESOURSES
- -------------------------------
In the 1998 Period, $125,700 of cash was used by operating activities.
This use of operational cash resulted primarily from funds provided by: net
income of $455,900; reduction in accounts receivable of $967,900 from improved
collection efforts; and a decrease in deferred taxes of $303,900. These sources
were offset by a decrease in accounts payable and accrued liabilities of
$728,900; an increase in inventory of $614,000; and, the non-cash gain on the
sales of assets of $570,500.
Net investing activities in the 1998 Period provided cash of $1,276,800.
The Company collected $643,800, net of expenses, relating to the sale of
property and equipment in Brooklyn, New York (these funds were applied to the
outstanding mortgage of $1,057,700, as described below), it collected $694,700
of notes receivable, which arose from the sale of its discontinued operations,
and collected $42,800 of loans made to its officers. Offsetting this, the
Company purchased $104,500 of property, plant and equipment.
Financing activities in the 1998 Period resulted in a utilization of
cash of $1,522,300. As a result of the Company's private placement of
securities, the Company received $257,700 for the issuance of common stock and
issuance of convertible notes payable, net of offering and debt issuance costs.
Offsetting this source of funds, the Company paid certain short-term borrowings
of $149,700, a long-term note payable of $75,000 due to its bank, as well as
$150,000 to pay the balance on a $250,000 convertible loan, as described below.
In addition, upon the sale of its property and equipment in Brooklyn, New York,
the Company applied the proceeds to the outstanding balance of the related
mortgage of $1,057,700.
12
Further, on April 13, 1998 the Company obtained a credit facility with a
new bank which provides for a maximum line of credit of $4.5 million. 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. An additional $500,000 is
available to finance equipment. The Company used the new credit availability to
pay its outstanding indebtedness on its former credit line of $937,000. The
former credit line had a maximum availability of $1,100,000 of which $750,000
was reserved for letters of credit (acceptances). In addition, the Company also
used the facility to repay outstanding letters of credit financed by a third
party. The Company also incurred deferred debt costs, primarily associated with
establishing the new bank line. The new facility contains certain financial
covenants with which the Company is in compliance.
On June 30, 1998, the Company received $121,500 for the exercise of all
of the 75,000 vested options owned by its former president.
On February 14, 1996, the Company obtained a thirteen month loan of
$250,000 bearing interest at 10% per annum. The loan was convertible, under
certain conditions at the option of the lender, into shares of the Company's
Common Stock at a conversion price of $1.00 per share. In October 1996, $100,000
of such debt was converted into 100,000 shares of Common Stock. The balance of
this note, $150,000, was paid in full in October 1997.
The Company's registration statement on Form SB-2 filed with the
Securities and Exchange Commision for the registration of 1,450,000 shares of
its Common Stock issuable upon exercise of certain outstanding warrants was
declared effective by the Commision on March 25, 1996. As of September 30,1997,
such warrants exercisable for 219,000 shares at $5.00 per share and 87,500
shares at $2.00 per share, remained outstanding. In the 1997 Period, certain
warrants were exercised and the Company issued 100,000 shares for a total of
$1,000. The Company's Common Stock is traded on the Nasdaq SmallCap Market and,
during the days immediately preceding May 13, 1998, was trading in the range of
approximately $3.00 per share. The Company anticipates that holders of its
remaining outstanding warrants will continue to exercise such warrants only if
the Common Stock trades at a substantial premium over the exercise price of the
warrants, of which there can be no assurance.
During Fiscal 1997 and in December 1997, the Company consummated the
1997 Private Placement of Units, each unit comprised of (i) 30,000 shares of
Common Stock, (ii) one warrant to purchase up to 30,000 shares of Common Stock
at $4.00 per share (a "Private Placement Warrant") and (iii) one unsecured
convertible promissory note in the principal amount of $10,000, bearing interest
at a rate of 10% per annum (convertible at the sole option of the Company under
certain circumstances, into 20,000 shares of Common Stock and one Private
Placement Warrant) maturing on December 4, 1998. 55.4 units were sold for
$25,000 per unit, aggregating $1,385,000, including $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.
At June 30, 1998, long-term debt amounted to $58,700 and all installment note
and capital lease payments were made on a timely basis. Long-term debt is
scheduled to be paid in fiscal 2000.
DEFERRED INCOME TAXES
- ---------------------
The Company's balance sheet at June 30, 1998 includes $1,706,700 of
deferred income taxes as an asset. The Company was profitable in the 1997 Period
and anticipates being profitable during the entire 1998 fiscal year and beyond.
However, to the extent that the Company's operation is not profitable in
future periods, the Company would not be able to realize the benefit of its
deferred tax assets. Without such deferred tax assets, at June 30, 1998, the
Company's stockholder's equity at such date of $5,018,400 would have been
reduced by $1,706,700 to a stockholder's equity of $3,311,700 and the Company's
working capital at June 30, 1998 would have been reduced by $690,000 from
$2,686,000 to $1,996,000.
13
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
During the Company's fiscal year ended September 30, 1997 and
in December 1997, the Company consummated its 1997 Private Placement of
units ("Units"), each unit comprised of (i) 30,000 shares of Common
Stock, (ii) one warrant to purchase up to 30,000 shares of Common Stock
at $4.00 per share (a "Private Placement Warrant") and (iii) one
unsecured convertible promissory note in the principal amount of $10,000,
bearing interest at a rate of 10% per annum (convertible at the sole
option of the Company under certain circumstances, into 20,000 shares of
Common Stock and one Private Placement Warrant) maturing on December 4,
1998. 55.4 units were sold for $25,000 per unit, aggregating $1,385,000,
including $554,000 aggregate principal amount of debt. A commission in
the amount of $169,500 was paid by the Company in connection with such
sales. The sales were made to accredited investors pursuant to Regulation
D promulgated under the Securities Act of 1933, as amended.
On December 23, 1997, the Company filed a Certificate of
Amendment to its Certificate of Incorporation so as to effectuate a
one-for-two reverse stock split of its issued and outstanding Common
Stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11: Computation of Income per Common Share
(b) Exhibit 27: Financial Data Schedule
(c) The Company's Current Report on Form 8-K dated
December 4, 1997
14
SIGNATURE
In accordance with to the requirements of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Dated: August 13, 1998
FORWARD SYSTEMS, INC.
(Registrant)
By: /s/ Philip B. Kart
-----------------------------------
PHILIP B. KART
Principal Financial Officer
15
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE
THREE MONTHS ENDED
JUNE 30,
---------------------------
1998 1997
---- ----
NUMERATOR
Income from continuing operations:
Income from continuing operations: $ 46,418 $ 185,679
Less: Preferred dividends --- ---
---------- ----------
Income available to common stockholders
used in basic EPS 46,418 185,679
Impact of potential common shares:
Convertible debt 8,310 2,250
Income available to common stockholders after
assumed conversions of dilutive securities $ 54,728 $ 187,929
========== ==========
Loss from discontinued operations $ --- $ (125,314)
========== ==========
DENOMINATOR
Weighted average number of common shares
outstanding used in basic EPS 4,723,141 3,226,141
Impact of potential common shares:
Stock options and warrants 385,078 136,950
Convertible debt 1,108,000 150,000
---------- ---------
Weighted number of common shares and dilutive
Potential common stock used in dilutive EPS 6,216,219 3,513,091
========== =========
BASIC EPS
Income from continuing operations $ 0.010 $ 0.058
Discontinued operations --- (0.039)
------- -------
$ 0.010 $ 0.019
======= =======
DILUTED EPS
Income from continuing operations $ 0.009 $ 0.053
Discontinued operations --- (0.035)
------- -------
$ 0.009 $ 0.018
======= =======
16
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE
THREE MONTHS ENDED
JUNE 30,
------------------------
1998 1997
---- ----
CALCULATIONS
1. Stock Options and Warrants
Treasury Stock Method Applied to Stock Options and Warrants
Sale of common stock
Total options and warrants outstanding 1,121,250 550,000
Average price $1.87 $1.26
------------- --------------
Total $ 2,091,719 $ 694,750
============ =============
Repurchase of common stock
Proceeds $ 2,091,719 $ 694,750
Average stock price $2.84 $1.68
------------ -------------
Shares repurchased 736,172 413,050
============ =============
Net increase in shares
Shares sold 1,121,250 550,000
Shares purchased 736,172 413,050
------------ -------------
Increase in shares 385,078 136,950
============ =============
Convertible debt
Terms:
Interest rate 10% 10%
Par $ 10,000 N/A
Convertible into shares 20,000 150,000
Conversion price N/A $ 1.00
# of units 55.4 N/A
Total debt $ 554,000 $ 150,000
If-converted Method Applied to Convertible Debt
Numerator increase - interest savings assuming
a 40% tax rate $ 8,310 $ 2,250
============ =============
Denominator increase - assuming conversion 1,108,000 150,000
============ =============
17
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE
NINE MONTHS ENDED
JUNE 30,
--------------------------------
1998 1997
---- ----
NUMERATOR
Income from continuing operations:
Income from continuing operations: $ 455,731 $ 400,139
Less: Preferred dividends --- ---
------------- -------------
Income available to common stockholders
used in basic EPS 455,731 400,139
Impact of potential common shares:
Convertible debt 24,930 6,750
Income available to common stockholders after
assumed conversions of dilutive securities $ 480,661 $ 406,889
============= =============
Loss from discontinued operations $ --- $ (289,056)
============= =============
DENOMINATOR
Weighted average number of common shares
outstanding used in basic EPS 4,528,141 2,975,427
Impact of potential common shares:
Stock options and warrants 353,466 145,605
Convertible debt 1,108,000 150,000
--------- -------
Weighted number of common shares and dilutive
potential common stock used in dilutive EPS 5,989,607 3,271,032
============== =============
BASIC EPS
Income from continuing operations $ 0.101 $ 0.134
Discontinued operations --- (0.097)
-------- --------
$ 0.101 $ 0.037
======== ========
DILUTED EPS
Income from continuing operations $ 0.080 $ 0.124
Discontinued operations --- (0.088)
-------- --------
$ 0.080 $ 0.036
======== ========
18
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF INCOME PER COMMON SHARE
NINE MONTHS ENDED
JUNE 30,
----------------------------
1998 1997
---- ----
CALCULATIONS
1. Stock Options and Warrants
Treasury Stock Method Applied to Stock Options and Warrants
Sale of common stock
Total options and warrants outstanding 1,121,250 769,000
Average price $1.87 $1.26
------------ ------------
Total $ 2,091,719 $ 694,750
============ =============
Repurchase of common stock
Proceeds $ 2,091,719 $ 694,750
Average stock price $2.72 $1.72
------------ -------------
Shares repurchased 767,784 404,395
============ =============
Net increase in shares
Shares sold 1,121,250 550,000
Shares purchased 767,784 404,395
------------ -------------
Increase in shares 353,468 145,605
============ =============
Convertible debt
Terms:
Interest rate 10% 10%
Par $ 10,000 N/A
Convertible into shares 20,000 150,000
Conversion price N/A $ 1.00
# of units 55.4 N/A
Total debt $ 554,000 $ 150,000
If-converted Method Applied to Convertible Debt
Numerator increase - interest savings assuming
a 40% tax rate $ 24,930 $ 6,760
============ =============
Denominator increase - assuming conversion 1,108,000 150,000
============ =============
19