**UNITED STATES  SECURITIES AND EXCHANGE COMMISSION  Washington, D.C. 20549**

**FORM 10-QSB**

(Mark One)

[X]       QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934                 for the quarterly period ended December 31, 2002.

or

[   ]       TRANSITION REPORT UNDER SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934                 for the transition period from   ____ to ____

Commission file number 0-6669

**FORWARD INDUSTRIES, INC.**(Exact name of registrant as  specified in its charter)

 

|                             New York                                                                                 |                   13-1950672                                                                                            |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  (State or other        jurisdiction of                                                                                                                                                                                                                                                                                                                                                                                     | (I.R.S.  Employer Identification No.)                                                                                                                                                                                                                                                             |
| incorporation or organization)                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                              |
|        1801 Green Rd., Suite E, Pompano  Beach, FL                                                                                                                                                                                                                                                                                                              |                                33064                        |
| (Address of principal executive offices)                                                                                                                                                                                                                                                                                                                                                                                         | (Zip Code)                                                                                                                                                                                                                                                                                        |
|                                                                         |                                                                                                                                                                                                                                                                                              |

 

                                 (954) 360-6420                              (Issuer's Telephone Number, including Area Code)

                                                                                                  (Former name, former address and former fiscal  year, if changed since last report)

Check whether the issuer: (1) has filed all  reports required to be filed by Section 13 or 15(d) of the Securities  Exchange Act of 1934 during the preceding 12 months (or for such shorter  period that the registrant was required to file such reports), and (2) has  been subject to such filing requirements for the past 90 days. Yes [X] No  [   ].

As of January 21, 2003, 5,790,441shares of Common  Stock were outstanding.

Transitional Small Business  Disclosure Format:    Yes [   ]   No [X] 

----

 

**FORWARD INDUSTRIES, INC. ANDSUBSIDIARIESFORM10-QSBTHREE MONTHS ENDED DECEMBER31, 2002 CONTENTS**

PAGE

**PART I**

**FINANCIAL  INFORMATION**

 

 

Item 1.

Financial  statements 

 

    Consolidated Balance Sheets as of  December 31, 2002 (Unaudited)

 

    and September 30, 2002............................................................................................................  

3

 

     Unaudited Consolidated Statements of  Income for the Three

 

    Months Ended December 31, 2002 and 2001........................................................................  

4

 

     Unaudited Consolidated Statements of  Cash Flows for the Three

 

    Months Ended December 31, 2002 and 2001........................................................................  

5

 

     Notes to Consolidated Financial  Statements.......................................................................  

6

 

Item 2.

Management's  Discussion and Analysis of Financial Condition and Results of  Operations.....................................................................................................................................  

  11

 

Item 3.

Controls  and Procedures.............................................................................................................  

14

 

**PART II**

**OTHER  INFORMATION**

 

 

Item 1.

Legal  Proceedings........................................................................................................................  

15

 

Item 2.

Changes  in Securities...................................................................................................................  

15

 

Item 3.

Defaults  upon Senior Securities.................................................................................................  

15

 

Item 4.

Submission  of Matters to a Vote of Security Holders............................................................  

15

 

Item 5.

Other  Information.........................................................................................................................  

15
            
Item 6.

Exhibits  and Reports on Form 8-K.............................................................................................  

16

 

Signatures......................................................................................................................................  

16

 

Certifications.................................................................................................................................  

17

. 

 

**Note RegardingUse of Certain Terms**

                In this Quarterly Report on Form 10-QSB, unless thecontext otherwise requires, the terms "we", "our","Company" and "Forward" refer to Forward Industries, Inc.,a New York corporation, together with its consolidated subsidiaries; "commonstock" refers to the common stock, $.01 par value per share, of ForwardIndustries, Inc.; "Koszegi" refers to our wholly owned subsidiaryKoszegi Industries Inc., an Indiana corporation; "Commission" refers to theUnited States Securities and Exchange Commission; and "Exchange Act" refers tothe United States Securities Exchange Act of 1934

2

**PART I.   FINANCIAL INFORMATION**

ITEM 1.  FINANCIAL STATEMENTS

**FORWARDINDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS**

 

 

 

 

 

 

 

 

 

December 31,

 

September 30,

 

2002

 

2002

**ASSETS**

(Unaudited)

 

 

 

 

 

 

Current assets:

 

 

 

   Cash and cash  equivalents............................................................................................  

$      1,391,525 

 

 $     1,207,311 

   Accounts receivable -  net ............................................................................................  

3,873,595 

 

2,680,916 

   Inventories........................................................................................................................  

1,182,426 

 

718,986 

   Prepaid expenses and  other current assets.................................................................  

128,688 

 

219,124 

   Deferred tax asset............................................................................................................  

15,500 

 

15,500 

      Total current  assets......................................................................................................  

6,591,734 

 

4,841,837 

 

 

 

Property, plant and equipment - net................................................................................  

346,480 

 

341,187 

Deferred tax asset...............................................................................................................  

161,700 

 

164,500 

Other assets.........................................................................................................................  

41,337 

 

41,337 

     **TOTAL ASSETS**...........................................................................................................  

$    7,141,251 

 

 $     5,388,861 

 

 

 

**LIABILITIES AND STOCKHOLDERS'  EQUITY**

 

 

 

 

 

 

Current liabilities:

 

 

 

   Accounts payable...........................................................................................................  

$   2,410,085 

 

 $     1,306,381 

   Accrued expenses and  other current liabilities...........................................................  

423,627 

 

291,984 

   Current portion of  capital lease obligations................................................................  

28,279 

 

27,814 

      Total current  liabilities.................................................................................................  

2,861,991 

 

1,626,179 

 

 

 

Long term portion of capital lease obligations...............................................................  

51,504 

 

58,751 

 

 

 

Commitments and contingencies.....................................................................................  

 

 

 

 

 

 

Stockholders' equity:

 

 

 

   Preferred stock,  4,000,000 authorized shares, par value $.01; none issued............. 

-- 

 

-- 

   Common stock,  40,000,000 authorized shares, par value $.01; 6,286,531

 

 

 

      shares issued  (including 496,090 and 460,890, respectively held in treasury).... 

62,865 

 

62,865 

   Paid-in capital...................................................................................................................  

8,251,780 

 

8,251,780 

   Accumulated deficit........................................................................................................  

(3,369,681)

 

(3,928,827)

     4,944,964 

 

4,385,818 

   Less: Cost of shares  in treasury....................................................................................  

(717,208)

 

(681,887)

      Total stockholders'  equity...........................................................................................  

4,227,756 

 

3,703,931 

 

 

 

**TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY**........................................  

$   7,141,251 

 

 $    5,388,861 

The accompanying notes are an integral part of theconsolidated financial statements.

 

3

 

**FORWARD INDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME(UNAUDITED)**

Three Months Ended  December 31, 

2002        

 

2001        

Net sales..............................................................................  

$     5,691,642 

$        4,377,073 

Cost of goods sold.............................................................  

3,851,623 

2,925,947 

Gross profit..........................................................................  

1,840,019 

1,451,126 

Operating expenses:

     Selling...............................................................................  

674,420 

755,215 

     General and administrative............................................  

619,988 

521,904 

          Total operating expenses.........................................  

1,294,408 

1,277,919 

Income from operations.....................................................  

545,611 

174,007 

Other income (expense):

     Interest expense.............................................................  

(1,401)

(21,645)

     Interest income...............................................................  

3,137 

                 7,315 

     Other income (expense).................................................  

36,799 

(4,539)

          Total other income (expense)...................................  

38,535 

(18,869)

Income before provision for income taxes......................  

584,146 

155,138 

Provision   for income taxes............................................... 

25,000 

16,900 

Net income ..........................................................................  

$      559,146 

$      138,238 

Net income per common and common equivalent  share

     Basic.................................................................................  

$            0.10 

 

$             0.02 

     Diluted.............................................................................  

$            0.10 

 

$             0.02 

Weighted average number of common and  common  equivalent shares outstanding

     Basic.................................................................................  

5,813,908 

5,825,641 

     Diluted..............................................................................  

5,813,908 

5,825,641 

 

 

 

 

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

4

 

 

**FORWARDINDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFCASH FLOWS(UNAUDITED)**

** **

Three Months Ended  December 31,

     2002

 

2001

CASH  FLOW FROM OPERATING ACTIVITIES:

Net income.............................................................................................................................  

$   559,146 

$      138,238 

Adjustments to reconcile  net income to net cash provided by operating activities:

        Depreciation  and amortization....................................................................................  

32,074 

31,821 

        Deferred  taxes................................................................................................................  

2,800 

-- 

         Changes in operating assets and liabilities:

        Accounts receivable.....................................................................................................  

(1,192,679)

(861,137)

        Inventories.....................................................................................................................  

(463,440)

(398,854)

        Prepaid expenses and other  current assets...............................................................  

90,436 

124,008 

        Other assets....................................................................................................................  

-- 

(500)

        Accounts payable..........................................................................................................  

1,103,704 

1,116,518 

        Accrued expenses and other  current liabilities.........................................................  

131,643 

46,835 

NET CASH  PROVIDED BY OPERATING ACTIVITIES..................................................  

263,684 

196,929 

CASH FLOW FROM INVESTING  ACTIVITIES:

         Proceeds from officer loan  repayments......................................................................  

-- 

4,963 

         Purchases of property,  plant and equipment............................................................  

(37,367)

(2,069)

NET CASH (USED IN)  PROVIDED BY INVESTING ACTIVITIES.................................. 

(37,367)

2,894 

CASH FLOW FROM FINANCING  ACTIVITIES:

        Payments of short-term  borrowings...........................................................................  

-- 

(500,000)

        Principal payments on  capital lease obligations.......................................................  

(6,782)

(6,346)

        Purchase of treasury  shares.........................................................................................  

(35,321)

-- 

NET CASH USED IN FINANCING  ACTIVITIES............................................................. 

(42,103)

(506,346)

NET INCREASE (DECREASE) IN  CASH AND CASH EQUIVALENTS

184,214  

(306,523)

CASH AND CASH  EQUIVALENTS - beginning of period...........................................  

1,207,311 

1,376,572 

CASH AND CASH EQUIVALENTS  - end of period...................................................... 

1,391,525 

$     1,070,049 

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

5

 

 

**FORWARDINDUSTRIES, INC. Notes to ConsolidatedFinancial StatementsThree-Month Periods Ended December 31, 2002 and 2001(Unaudited)**

1.      BASIS OF PRESENTATION

The accompanying unauditedconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States for interimfinancial information and with the instructions to Form 10-QSB and Article 10of Regulation S-X.  Accordingly, they donot include all the information and footnotes required by accounting principlesgenerally accepted in the United States for complete financial statements.  In the opinion of management, alladjustments (consisting of normal recurring accruals) considered necessary fora fair presentation have been included. Operating results for the three-month period ended December 31, 2002 arenot necessarily indicative of the results that may be expected for the fiscalyear ending September 30, 2003.

The consolidated balance sheet at September 30, 2002 has been derivedfrom the audited consolidated financial statements at that date, but does notinclude all of the information and footnotes required by accounting principlesgenerally accepted in the United States for complete financial statements.

The accounting policies used in the preparation ofthe financial statements included in this Form 10-QSB are the same as those setforth in the Company's annual report on Form 10-KSB for the fiscal year endedSeptember 30, 2002 and should be read in conjunction with the disclosurespresented therein.  

Certain reclassifications ofthe prior period's financial statements have been made to conform to thecurrent period's presentation.

The Company did not have any materialcomponents of comprehensive income other than net income.

**Recent AccountingPronouncements**

In October 2001, theFinancial Accounting Standards Board (the "FASB") issued Statement of FinancialStandards No. 144, *Accounting for the Impairment or Disposal of Long-LivedAssets*(Statement). The Statement supersedes FASB Statement No. 121, *Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to be DisposedOf*(FAS 121), however it retains the fundamental provisions of thatstatement related to the recognition and measurement of the impairment oflong-lived assets to be "held and used." In addition, the Statementprovides more guidance on estimating cash flows when performing arecoverability test, requires that a long-lived asset (group) to be disposed ofother than by sale (e.g., abandoned) be classified as "held and used"until it is disposed of, and establishes more restrictive criteria to classifyan asset (group) as "held for sale."

The Statement alsosupersedes the accounting and reporting provisions of Accounting PrinciplesBoard Opinion No. 30, *Reporting the Results of Operation's-Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions* (APB 30), for the disposalof a segment of a business and would extend the reporting of a discontinuedoperation to a "component of an entity." Further, the Statementrequires operating losses from a "component of an entity" to berecognized in the period(s) in which they occur (rather than as of themeasurement date as previously required by APB 30). The Company adopted SFAS144 effective October 1, 2002 and it did not have a material impact on theCompany's current financial position or results of operations.

 

6

 

**FORWARDINDUSTRIES, INC. Notes to Consolidated Financial StatementsThree-Month Periods Ended December 31, 2002 and 2001(Unaudited)**

 

**Recent AccountingPronouncements (continued)**

In July 2002, the FASB issued SFAS No. 146, *Accountingfor Costs Associated with Exit or Disposal Activities*. This Statementaddresses financial accounting and reporting for costs associated with exit ordisposal activities and nullifies Emerging Issues Task Force (EITF) IssueNo.94-3, *Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity* (including Certain Costs Incurred in aRestructuring). This Statement applies to costs associated with an exitactivity that does not involve an entity newly acquired in a businesscombination or with a disposal activity covered by SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Asse*ts. These costs include,but are not limited to: termination benefits provided to current employees thatare involuntarily terminated under the terms of a benefit arrangement that, insubstance, is not an ongoing benefit arrangement or an individual deferredcompensation contract, costs to terminate a contract that is not a capitallease and costs to consolidate facilities or relocate employees. This Statementdoes not apply to costs associated with the retirement of a long-lived assetcovered by SFAS No. 143, *Accounting for Asset Retirement Obligations*.This statement will be adopted effective January 1, 2003 and its applicationwill not have a material impact on the Company's current financial position orresults of operations.

On December 31, 2002, the FASB issued SFASNo. 148, *Accounting for Stock-Based Compensation - Transition and Disclosure*.  Statement 148 amends FASB Statement No. 123,*Accounting for Stock-Based Compensation*, to provide alternative methodsof transition to Statement 123's fair value method of accounting forstock-based employee compensation. Statement 148 also amends the disclosure provisions of Statement 123 andAPB Opinion No. 28, *Interim Financial Reporting*, to require disclosure inthe summary of significant accounting policies of the effects of an entity'saccounting policy with respect to stock-based employee compensation on reportednet income and earnings per share in annual and interim financial statements.  While the Statement does not amend Statement123 to require companies to account for employee stock options using the fairvalue method, the disclosure provisions of Statement 148 are applicable to allcompanies with stock-based employee compensation, regardless of whether theyaccount for that compensation using the fair value method of Statement 123 orthe intrinsic value method of Opinion 25. The Company will adopt the required disclosure provisions of SFAS No.148 effective January 1, 2003, and its application is not expected to have amaterial impact on the Company's current financial position or results ofoperations

This quarterly report contains forward-lookingstatements which involve certain risks and uncertainties. Important factorscould arise, including those discussed in Management's Discussion and Analysisof Financial Condition and Results of Operations set forth in this quarterlyreport on Form 10-QSB and those identified in "Risk Factors" in the Company'sannual report on Form 10-KSB for the year ended September 30, 2002, which couldcause the Company's future operating results to differ materially from those setforth in any forward looking statement.  

2.       BORROWINGS UNDER CREDIT LINE

InSeptember 2002, the Company renewed its credit facility with a bank thatprovides for a maximum uncommitted line of credit of $1.5 million, including$500,000 for letters of credit. The line is renewable annually at thediscretion of the bank and expires September 30, 2003. The Company is requiredto eliminate borrowings for thirty consecutive days during the term of thefacility and is required to maintain operating performance that is acceptableto the bank.  The Company completed itsthirty-day period with no borrowings in October 2002. Amounts drawn under thecredit facility bear interest at the prime rate (4.25% as of December 31, 2002)in effect from time-to-time plus one half of one percent and are secured by aportion of a subsidiary's assets. There are no fees with respect to undrawnbalances. At December 31, 2002, there were no outstanding borrowings under theline of credit or outstanding obligations under letters of credit.

 

7

 

**FORWARDINDUSTRIES, INC. Notes to Consolidated Financial StatementsThree-Month Periods Ended December 31, 2002 and 2001(Unaudited)**

3.      BUSINESS SEGMENT INFORMATION

The Company operates in asingle segment providing carrying solutions for portable electronic devices.The Company designs and markets its products primarily to manufacturers ofelectronic devices such as wireless telecommunications devices and medicalequipment.  Geographic locations aredetermined based primarily on the location of the customer.   Information by geographic location is asfollows:

**Revenues from externalcustomers:**

                                                                                                    Three Months Ended                                                                                                        December 31,

                                                                                                   (thousands of dollars)

2002

 

2001

United  States

   $  3,081

 

$         1,614

Europe

     2,325

 

                2,762

Other

        286

 

                1

   Total  net sales

$  5,692

 

$         4,377

4.       EARNINGS PER SHARE

Basic earningsper share is computed using the weighted-average number of common sharesoutstanding during each period. Diluted earnings per share is computed usingthe weighted-average number of common and dilutive common-equivalent sharesoutstanding during the period. Dilutive common-equivalent shares consist ofshares that would be issued upon the exercise of stock options and warrants(computed using the treasury stock method). The average prices for theCompany's common stock for the three-month periods ended December 31, 2002 andDecember 31, 2001 were $0.95 and $0.90, respectively, which were below theexercise price of any options outstanding. Accordingly, no exercise or dilutionis presumed to have occurred.

              Calculation of earnings per shareis as follows:

 

Three Months Ended  December 31,
      
 

2002       

 

2001           

Numerator:

 

 

 

 

     Net income...................................................  

$          559,146

        $          138,238

Denominator:

Denominator for basic  earnings per share -      weighted average shares...........................  

5,813,908

5,825,641

Dilutive stock options and warrants -      treasury stock method..............................  

**

**

Denominator for diluted  earnings per share -      weighted average shares........................  

5,813,908

5,825,641

Net income per common share

     Basic.............................................................  

$               0.10

$                0.02

     Diluted..........................................................  

$               0.10

$                0.02

 

8

 

**FORWARDINDUSTRIES, INC. Notes to Consolidated Financial StatementsThree-Month Periods Ended December 31, 2002 and 2001(Unaudited)**

 

EARNINGS PER SHARE (CONTINUED) 

** No dilutive common equivalent shareswere outstanding because the average stock price of our common stock was belowthe exercise price of all outstanding options and warrants.  Common stock equivalents of 2,353,750 and2,374,625 shares were not considered in the computation of diluted earnings pershare in the three-month periods ended December 31, 2002 and 2001,respectively, because their inclusion would have been anti-dilutive.

5.       INCOME TAXES

The Company's income tax provisionconsists of the following:

          Three Months Ended                     December 31,
   
U.S. Federal and State

2002

2001

   Current......................... 

$                --

 

$                 --

   Deferred....................... 

                 --

 

--

 

 

 

Foreign:

 

 

 

   Current......................... 

         25,000

 

--

   Deferred....................... 

--

 

          16,900

Income  tax provision

$    25,000

 

$       16,900

In June 2001, the Company established a wholly ownedforeign subsidiary in Switzerland to engage in marketing and distributionactivities throughout Europe, the Middle East and Africa. At December 31, 2002,the subsidiary had cumulative undistributed earnings of approximately$218,000.  The Company considers itsinvestment in the subsidiary to be permanent.  Accordingly, no provision has been made for U.S. federal income taxes onundistributed foreign earnings.  

The Company also has notrecorded a provision for U.S. income taxes on its U.S. sourced income becauseit has, as a component of its deferred tax assets, sufficient net operating taxloss carryforwards available to offset its current U.S. taxable income. TheCompany has recorded a valuation allowance to reduce its deferred tax assets totheir net realizable value. The Company will continue to monitor the likelihoodof realization of the benefits of its deferred tax assets and may adjust thevaluation allowance in future periods as the benefit of the asset becomes morecertain. 

6.       COMMITMENTS AND CONTINGENCIES

**Royalty Commitments**

TheCompany has licensed the use of certain trademarks of Motorola, Inc.("Motorola") for products to be sold throughout Europe, the MiddleEast and Africa (the "EMEA Region") effective January 1, 2001.  Under the terms of the license agreement, asamended, the Company is required to pay Motorola a royalty based upon apercentage of the Company's net sales to third parties of licensed productswithin the EMEA Region. The license requires or required the Company to makeminimum guaranteed royalty payments to Motorola over three contract periods asfollows:
- $665,000 for the contract period July 1, 2001 to    September 30, 2002
- $332,000 for the contract period October 1, 2002 to    September 30, 2003
- $408,000 for the contract period October 1, 2003 to    September 30, 2004

 

9

 

**FORWARDINDUSTRIES, INC. Notes to Consolidated Financial StatementsThree-Month Periods Ended December 31, 2002 and 2001(Unaudited)**

 

If the Company elects to terminate the license before September 30,2004, the Company would be required to pay the balance, if any, of the minimumguarantee for the contract period in effect at the date of cancellation.

The minimum royalty commitments are recognized as an expense over theapplicable contract period.  The Companyrecorded royalty expense of $97,000 and $185,000 in the three-month periodsended December 31, 2002 and 2001, respectively, which is included as acomponent of selling expense in the accompanying consolidated statements ofincome.

 

 

 

10

 

**FORWARDINDUSTRIES, INC. Notes to Consolidated Financial StatementsThree-Month Periods Ended December 31, 2002 and 2001(Unaudited)**

 

COMMITMENTS & CONTINGENCIES(CONTINUED)

**Legal Proceedings**

InOctober 2001, the Company initiated action against Royal Industries, Inc.(Royal) in the Kings County Supreme Court of New York, asserting causes ofaction for conversion and unjust enrichment. The Company alleges that, without consent or authority of the Company,and with full knowledge of the Company's rights under a security agreement,Royal wrongfully took possession of certain assets in which the Company had aproperly perfected security interest. The Company seeks compensatory damages of $1 million.  Royal has filed a counterclaim against theCompany alleging abuse of process and harassment, and is seeking an award ofpunitive damages in the amount of $1 million. Discovery is in the preliminary stage, but management believes thecounterclaim is without merit and intends to vigorously defend the Companyagainst these allegations.

 

 

 

11

 
ITEM 2:   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS

        Thefollowing discussion and analysis should be read in conjunction with theCompany's Unaudited Financial Statements and the notes thereto appearingelsewhere in this Report.  This Reportcontains statements that constitute forward-looking statements within themeaning of the Private Securities Litigation Reform Act of 1995.  The Company cautions that forward-looking statementsare not guarantees of future performance and involve risks and uncertainties,(including those identified in "Risk Factors" in the Company's Form 10-KSB forthe year ended September 30, 2002) and that actual results may differmaterially from the estimates or forecasts set forth in the statements thatconstitute forward-looking statements as a result of various factors.

        Thefollowing discussion and analysis compares our results of operations for thethree months ended December 31, 2002, and the three months ended December 31,2001. 

**Resultsof Operations for the Three Months Ended December 31, 2002 (the "2002 Quarter")Compared to the Three Months Ended December 31, 2001 (the "2001 Quarter")**

Our net income in the 2002 Quarter was $559 thousandcompared to net income of $138 thousand in the 2001 Quarter, an increase ofapproximately $421 thousand.  Basic anddiluted earnings per share were $0.10 for the 2002 Quarter compared to $0.02per share in the 2001 Quarter.  The 2002Quarter represents our fifth consecutive quarter of profitability.

**Sales and Gross Profit**

        Our consolidated net salesincreased approximately $1.31 million or 30% to $5.69 million in the 2002Quarter from $4.38 million in the 2001 Quarter.  Strong demand for our line of diabetic monitoring equipmentcarrying cases was the primary reason for the sales increase.  We sell these cases to manufacturers ofdiabetic monitoring and testing equipment such as Bayer, Lifescan, Roche,Abbott Laboratories and Therasense.

        Sales of our cellular phonecarrying cases also increased in the 2002 Quarter compared to the 2001 Quarter.Sales to Motorola, the Company's largest customer, increased approximately $230thousand to $2.13 million in the 2002 Quarter and comprised approximately 37%of overall sales compared to $1.90 million in the 2001 Quarter or 43% of the2001 Quarter's sales.  Additionally,under our licensing agreement with Motorola, we sold approximately $640thousand of Motorola branded products to third parties in the 2002 Quarter comparedto $500 thousand of such sales in the 2001 Quarter.

        Ourgross profit increased approximately $389 thousand or 27% to $1.84 million from$1.45 million as a result of higher sales volumes.  Our gross profitpercentage remained fairly consistent at 32% in the 2002 Quarter compared to 33%in the 2001 Quarter despite increased costs we incurred to ship some of ourproducts by air as a result of labor strikes on the west coast of the UnitedStates in the 2002 Quarter.

**Income from Operations**

       Consolidated pretax income from operations increased approximately $372 thousandto $546 thousand in the 2002 Quarter, compared to $174 thousand in the 2001Quarter.  Our overall operating expenses increased $17 thousand or 1% to$1.29 million in the 2002 Quarter from $1.28 million in the 2001 Quarter. Operating expenses declined as a percentage of sales to 23% in the 2002 Quartercompared to 29% in the 2001 Quarter due primarily to our higher sales volume inthe 2002 Quarter.

       Selling expenses decreased $81 thousand, or approximately 11%, to $674 thousandin the 2002 Quarter, from $755 thousand in the 2001 Quarter.  The decreaseis due primarily to lower royalty expenses paid to Motorola due to a change inour license agreement, and lower travel expenses.  The ratio of sellingexpenses to net sales decreased to 12% in the 2002 Quarter, from approximately17% in the 2001 Quarter, as a result of the higher sales volume in the 2002Quarter.   

 

12

 

       General and administrative expenses increased $98 thousand, or approximately19%, to $620 thousand in the 2002 Quarter, from $522 thousand in the 2001Quarter due to increased personnel costs and slightly higher legal andprofessional fees.  The ratio of general and administrative expenses to netsales decreased to approximately 11% in the 2002 Quarter, from approximately 12%in the 2001 Quarter, due to the higher sales volume in the 2002 Quarter. 

**Other Income (Expense)**

       Because we had no borrowings under our bank line of credit at any time duringthe 2002 Quarter, our interest expense declined approximately $20 thousand to $1thousand, compared to $22 thousand in the 2001 Quarter.  Other income(expense) increased $42 thousand to $37 thousand of income in the 2002 Quartercompared to expense of  $5 thousand in the 2001 Quarter.  The changeis due primarily to realized and unrealized foreign currency gains and losses onour Euro denominated accounts.

**Income Taxes**

        In the 2002Quarter, our provision for income taxes increased by $8 thousand to $25thousand compared to $17 thousand in the 2001 Quarter.  The increase was a result of higher earningsgenerated by our subsidiary in Switzerland. We did not record a provision for U.S. income taxes in either quarter aswe have sufficient net operating tax loss carryforwards available to offset ourcurrent U.S. taxable income for which we have recorded a valuationallowance.  We will continue tomonitor the likelihood of realization of the benefits of our deferred taxassets and may adjust the allowance in future periods as the benefit of theasset becomes more certain.

**Liquidity and Capital Resources**

        We generated $264 thousandof cash from operations in the 2002 Quarter, compared to $197 thousand in the2001 Quarter.  The 2002 Quarter'soperating cash flows resulted primarily from net income of $559 thousand,adjusted for non-cash items including deferred taxes of $2 thousand anddepreciation expense of $32 thousand. The increases in accounts receivable and inventory of $1.2 million and  $463 thousand, respectively, were a result ofhigher sales and were partially offset by increases in accounts payable of $1.1million, accrued expenses of $132 thousand and decreases in prepaid expense of$90 thousand. 

        Weused $37 thousand of cash in investing activities in the 2002 Quarter topurchase additional computer equipment and software, compared to providing $3thousand in the 2001 Quarter.

       Financing activities used $42 thousand in cash in the 2002 Quarter, including$35 thousand used to purchase 35,200 shares of our common stock in the openmarket and to make $7 thousand of capital lease principal payments.  In the2001 Quarter, financing activities used $506 thousand when we repaid $500thousand of our credit line and made $6 thousand in capital lease principalpayments. 

        AtDecember 31, 2002, our current ratio (current assets divided by currentliabilities) was 2.30 and our quick ratio (current assets less inventoriesdivided by current liabilities) was 1.89. Our working capital (current assetsless current liabilities) was approximately $3.7 million and our only long-termdebt consisted of approximately $52 thousand owed on capital leases. 

        Ourprimary sources of liquidity are our operating cash flow and our bank creditfacility. The primary demands on our working capital are: our accounts payablearising in the ordinary course of business, the most significant of which arisewhen our customers place orders and we order from our suppliers; and ourcommitments under our license agreement with Motorola. Historically, oursources of liquidity have been adequate to satisfy working capital requirementsarising in the ordinary course of business. However, it is possible that if oneof our significant original equipment manufacturer customers placed anunusually large order with us at a time when our credit facility could notaccommodate the increased demands on our working capital, we might have to seekadditional sources of liquidity. Although there can be no assurance, we believethat, under such circumstances, we could obtain an increase in our creditfacility or obtain necessary funds under an additional facility.

 

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        We renewed our credit facility with a bank effectiveSeptember 30, 2002 until September 30, 2003. The credit facility provides for amaximum uncommitted line of credit totaling $1.5 million, including a $1.0million sublimit for direct borrowings and bankers acceptances and a $500,000sublimit for letters of credit.  Thecredit line is renewable at the discretion of the bank and is secured by aportion of our assets. There are no financial ratios or other restrictivecovenants associated with the credit facility. We are, however, required tohave a consecutive 30-day period during the term of the credit facility withzero borrowings, submit to periodic bank examinations and maintain performanceacceptable to the bank.  Amountsborrowed under the credit facility bear interest at the bank's prime rate ineffect from time-to-time plus one half of one percent. There are no feespayable in respect of undrawn balances under the credit facility. This is anuncommitted line of credit and there is no guarantee the bank will grantadditional cash advances under the line of credit to us if required, or thatour performance will remain satisfactory to the bank, or that the bank willrenew the credit facility. Although we believe that we could obtain alternatefinancing in the event of a loss of our current facility, there can be noassurance that such financing could be obtained and the failure to do so couldhave a material adverse affect on our liquidity and financial condition. Wecompleted the 30-day period with zero borrowings in October 2002. At December31, 2002, we had no borrowings under the credit facility and no commitments forletters of credit and the entire credit line was available for our use.

        OnSeptember 27, 2002, our Board of Directors authorized the repurchase of up to400,000 shares of our common stock, or approximately seven percent. In the 2002Quarter we purchased 35,200 shares of common stock for an aggregate purchaseprice of $35,300 in the open market.  We have not made any otherrepurchases under that authorization.

        We have licensed the use of certain trademarks of Motorola, whichpermits us to sell carrying cases bearing those marks throughout the EMEARegion. Under the terms of the license agreement, effective January 1, 2001, weare required to pay Motorola a royalty based upon specified percentages of ournet sales to third parties of licensed products within the EMEA Region. Thelicense, as it has been amended, requires or required us to make minimumroyalty payments to Motorola over three contract periods as follows:
-  $665,000 for the contract period of July 1,2001 to September 30, 2002 
-  $332,000 for the contract period of October 1,2002 to September 30, 2003 
-  $408,000 for the contract period of October 1,2003 to September 30, 2004 

        Ifwe elect to terminate the license before September 30, 2004, we would berequired to pay the royalty due for the contract period in effect at the date ofcancellation. Motorola has not guaranteed us a minimum amount of revenues fromthe sale of the licensed products and we cannot guarantee that we will generatesufficient revenues to recoup the minimum royalty payments that we are obligatedto pay to Motorola. The failure to generate such revenues could have a materialadverse effect on our results of operations.  In the 2002 Quarter wegenerated approximately $640 thousand of sales to third parties under thislicense agreement for which we are obligated to pay Motorola a royalty in excessof the minimum quarterly installment payable under the agreement.

        TheCompany did not incur any long-term debt in the 2002 Quarter and at December 31,2002 we had no long-term debt other than capital lease obligations outstanding.

 

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**ContractualObligations and Commercial Commitments**

        TheCompany has entered into various contractual obligations and commercialcommitments that, under accounting principles generally accepted in the UnitedStates, are not recorded as a liability.   The following is a summaryof such contractual cash obligations as of December 31, 2002:

**Contractual  Obligation or  Commitment**

**Jan 03 - Dec 03**

**Jan 03- Dec 05**

**Jan 06 - Dec 07**

**Thereafter**

Employment & Consulting Agreements

$   800,000

$   230,000

$              0

$              0

Operating Leases

 183,000

                  355,000

57,000

0

License Agreements**

351,000

306,000

0

0

Totals

$1,334,000

$891,000

$   57,000

$              0

**The amounts shown as licensee agreement obligations represent the minimumamounts the Company would incur as a royalty expense under the present terms ofits Motorola license agreement.. 

TheCompany has not guaranteed the debt of any unconsolidated entity and does notengage in derivative transactions or maintain any off-balance sheet specialpurpose entities.  

ITEM 3.          CONTROLSAND PROCEDURES

**Evaluation of disclosure controls and procedures**.  

        Our chief executive officer and chieffinancial officer have reviewed and evaluated the effectiveness of ourdisclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 underthe Securities Exchange Act of 1934 (the "Exchange Act")), as of a date withinninety days before the filing of this quarterly report. Based on thatevaluation, the chief executive officer and chief financial officer haveconcluded that our current disclosure controls and procedures are effective toensure that information required to be disclosed by us in reports that we fileor submit under the Exchange Act is recorded, processed, summarized, andreported within the time periods specified in the Commission's rules and forms.

**Changes in internal controls**.  

        There have not been any significantchanges in our internal controls or in other factors that could significantlyaffect these controls subsequent to the date of their evaluation. There were nosignificant deficiencies or material weakness in the internal controls, andtherefore no corrective actions were taken
 
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**PART II.     OTHER INFORMATION**

        ITEM 1.                  LEGAL PROCEEDINGS

                None.

        ITEM 2.                  CHANGES IN SECURITIES

                None.

        ITEM 3.                  DEFAULTS UPON SENIORSECURITIES

                None.

        ITEM 4.                  SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS

                None

        ITEM 5.                  OTHER INFORMATION

Previously, on October 22, 2002, Nasdaq had advised usthat our common stock did not meet the requirements for continued listing onthe Nasdaq SmallCap Market and that, effective November 1, 2002, our commonstock would be delisted for failing to maintain a minimum bid price of $1. Werequested a hearing to review Nasdaq's determination, and a hearing was heldDecember 5, 2002. On January 6, 2003, the Nasdaq Listing Qualifications Panelinformed us that they were of the opinion that we had evidenced compliance withthe bid price requirement and all other requirements for continued listing onthe Nasdaq SmallCap Market, and they expressed confidence in our ability tosustain compliance with those requirements over the long term.  Accordingly, the Panel determined tocontinue listing our common stock and closed the hearing file.

EffectiveJanuary 1, 2003, Mr. Jerome Ball, our Chairman and Chief Executive Officer, andthe Company agreed to extend his employment agreement for two years untilDecember 31, 2004 in accordance with the extension terms of such agreement. Inaddition, in consideration for Mr. Ball's agreement that the Company would haveno further obligations with respect to a New York City apartment, the lease forwhich was assumed by the Company in connection with the relocation of ouroffices to Florida in 2000, Mr. Ball's annual salary was increased to$230,000.  Because he previously agreedto forego $40,000 per year, as noted below, he will be paid an annual salary of$190,000 until September 30, 2003 and $230,000 thereafter.  Our Compensation Committee approved therevised terms of Mr. Ball's employment. All other terms and conditions of Mr. Ball's employment agreement remainunchanged. 

As previously reported, effective August 1, 2002, Mr. Ball, and otherexecutives of the Company agreed to forego a portion of the salaries stipulatedin their respective employment agreements. Mr. Ball agreed to forego $40,000 on an annual basis until September 30,2003.  Mr. Ball and the other executivesfurther agreed that such amounts would be repaid only if the Company achievescertain profitability targets in Fiscal 2003 as set forth by our compensationcommittee.

 

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        ITEM 6.        EXHIBITS AND REPORTS 

(a) Exhibits filed herewith:

99.1       Certificationof the Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of2002

99.2       Certificationof the Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of2002

(b) Reports on Form 8-K 

        For the three month period ended December 31, 2002 theCompany filed the following current reports on Form 8-K:

The Company's Current Reportfiled October 24, 2002 on Form 8-K, Item 5, announcing its intention to appeala decision by NASDAQ to delist the Company's common stock effective November 1,2002.

The Company's Current Reportfiled November 26, 2002, on Form 8-K, Item 9, announcing its results ofoperations for the year ended September 30, 2002.

**SIGNATURES**

In accordance with the requirements of the SecuritiesExchange Act of 1934, the registrant caused this report to be signed on itsbehalf by the undersigned, hereunto duly authorized.

Dated:  January 21, 2003 
FORWARD INDUSTRIES, INC.                  (Registrant)  By: /s/  Jerome E. BallJerome E. Ball Chairman and Chief Executive Officer  By:/s/  Douglas W. SabraDouglasW. SabraVice President, Chief Financial Officer and Principal Accounting Officer
 

 

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**CERTIFICATIONS**

I, Jerome E. Ball, certify that:

1.                   I have reviewed thisquarterly report on Form 10‐QSB of Forward Industries, Inc.;

2.                   Based on my knowledge,this quarterly report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

3.                   Based on my knowledge,the financial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

4.                   The registrant's othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a‐14and 15d‐14) for the registrant and we have:

a)                  designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

b)                  evaluated theeffectiveness of the registrant's disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the"Evaluation Date"); and

c)                  presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

5.                   The registrant's othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant's auditors and the audit committee of registrant's board ofdirectors (or persons performing the equivalent functions):

d)                  all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant's ability to record, process, summarize andreport financial data and have identified for the registrant's auditors anymaterial weaknesses in internal controls; and

e)                  any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant's internal controls; and

6.                   The registrant's othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent  to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

Date: January 21, 2003
/s/Jerome E. BallJerome E. BallChairman of the Boardand Chief Executive Officer(Principal Executive Officer) 
 

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**CERTIFICATIONS**

I, Douglas W. Sabra, certify that:

1.                   I have reviewed thisquarterly report on Form 10‐QSB of Forward Industries, Inc.;

2.                   Based on my knowledge,this quarterly report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

3.                   Based on my knowledge,the financial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

4.                   The registrant's othercertifying officers and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a‐14 and 15d‐14)for the registrant and we have:

a)                  designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

b)                  evaluated theeffectiveness of the registrant's disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the"Evaluation Date"); and

c)                  presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

5.                   The registrant's othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant's auditors and the audit committee of registrant's board ofdirectors (or persons performing the equivalent functions):

d)                  all significant deficienciesin the design or operation of internal controls which could adversely affectthe registrant's ability to record, process, summarize and report financialdata and have identified for the registrant's auditors any material weaknessesin internal controls; and

e)                  any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant's internal controls; and

6.                   The registrant's othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent  to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

Date: January 21 , 2003
/s/Douglas W. SabraDouglas W. Sabra        Chief Financial Officer(Principal Financial and Accounting Officer) 
 

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