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

** FORM 10-QSB**

**  **

(Mark One)

 

[X]       QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934                 for the quarterly period ended June 30, 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 July 25, 2002, 5,825,641Shares of the issuer's Common Stock were  outstanding.

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

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1

----

 

**FORWARD INDUSTRIES, INC. ANDSUBSIDIARIESFORM10-QSBNINE MONTHS ENDED JUNE 30,2002CONTENTS**

 

 

 

 

PAGE

PART I

 

FINANCIAL  INFORMATION

 

 

 

 

 

 

Item 1.

Financial  Statements (Unaudited)

 

 

 

    Consolidated Balance Sheets as of June  30, 2002 

 

 

 

    and September 30, 2001..........................................................

3

 

 

 

 

 

 

    Consolidated Statements of Income for  the Three

 

 

 

    and Nine Months Ended June 30, 2002 and  2001.................... 

4

 

 

 

 

 

 

    Consolidated Statements of Cash Flows  for the Nine

 

 

 

    Months Ended June 30, 2002 and  2001..................................

5

 

 

 

 

 

 

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

6

 

 

 

 

 

Item 2.

Management's Discussion and Analysis or Plan of Operation.......

10

 

 

 

 

PART II

 

OTHER  INFORMATION

 

 

 

 

 

 

Item 1.

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

14

 

 

 

 

 

Item 2.

Changes  in Securities and Use of Proceeds...................................

14

 

 

 

 

 

Item 3.

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

14

 

 

 

 

 

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...............................................

15

 

 

 

 

 

 

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

16

 

 

 

 

 

 

 

 

 

 

 

 

PART I.   ITEM 1. FINANCIAL STATEMENTS

 

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

 

 

     June 30,

 

  September 30,

 

     2002    

 

  2001  

**ASSETS**

  (Unaudited)

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

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

$           782,329  

 

 $      1,376,572  

   Accounts receivable,  less allowance for doubtful accounts of $39,115 and    $86,500,  respectively.......................................................................................

  3,096,049  

 

 

2,541,391 

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

1,035,056  

 

753,926  

   Notes and loans receivable - officers - current portion  .....................................

34,200  

 

20,300  

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

170,035  

 

269,728  
      
      Total current  assets........................................................................................

5,117,669  

 

4,961,917  

 

 

 

 

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

365,741  

 

457,132 

Assets held for sale  -net.......................................................................................

--  

 

179,475 

Notes and loans receivable - officers - net of current  portion................................. 

50,854  

 

83,618  

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

53,992  

 

38,558  
      
Total Assets......................................................................................................... 

$       5,588,256  

 

 $      5,720,700  
      
 

 

 

 

**LIABILITIES AND STOCKHOLDERS'  EQUITY**

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

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

$      1,254,334  

 

 $      1,051,609  

   Notes and acceptances payable under credit line  .............................................

600,000  

 

1,500,000  

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

27,300  

 

26,030  

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

354,345  

 

208,157  
      
      Total current  liabilities....................................................................................

2,235,979  

 

2,785,796  

 

 

 

 

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

65,934  

 

86,565  

 

 

 

 

COMMITMENTS AND CONTINGENCIES 

--  

 

--  

 

 

 

 

STOCKHOLDERS' EQUITY

 

 

 

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

--  

 

--  

   Common stock, 40,000,00 authorized shares, par value $.01;  6,286,531

 

 

 

     shares issued (including  460,890 held in treasury)...........................................

62,865  

 

62,865  

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

8,251,780  

 

8,251,780  

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

(4,346,415)

 

(4,784,419)
      
 

3,968,230  

 

3,530,226  

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

(681,887)

 

(681,887)
      
      Total stockholders'  equity.............................................................................

3,286,343  

 

2,848,339  
      
 

 

 

 

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

$       5,588,256  

 

 $      5,720,700  
                  
 

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

3

 

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

 

 

Three Months Ended June  30, 

 

Nine  Months Ended June 30,

 

2002

 

2001

 

2002

 

2001

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

$   4,051,225  

 

$       2,348,083  

 

$   12,279,901  

 

$    9,905,857  

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

2,492,811  

1,710,402  

 

7,969,936  

6,574,396  

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

1,558,414  

 

637,681  

 

4,309,965  

 

3,331,461  

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

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

704,067  

 

588,014  

 

2,160,367  

 

1,586,984  

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

626,857  

 

559,884  

 

1,681,069  

 

1,583,379  

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

1,330,924  

 

1,147,898  

 

3,841,436  

 

3,170,363  

 

 

 

 

 

 

 

 

Income (loss) from operations.................................

227,490  

 

(510,217)

 

468,529  

 

161,098  

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

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

(12,122)

 

(5,648)

 

(47,998)

 

(18,711)

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

3,165  

 

15,010  

 

14,419  

 

44,830  

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

10,778  

 

(8,370)

 

3,054  

 

12,939  

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

1,821  

 

992  

 

(30,525  

)

39,058  

 

 

 

 

 

 

 

 

Income (loss) before provision for income  taxes.......

229,311  

 

(509,225)

 

438,004  

 

200,156  

Provision (benefit) for income taxes..........................

(19,400)

 

(203,690)

 

--  

 

80,060  

 

 

 

 

 

 

 

 

Net income (loss).................................................... 

$      248,711  

 

$     (305,535)

 

$        438,004  

 

$      120,096  

 

 

 

 

 

 

 

 

NET INCOME (LOSS) PER COMMON AND COMMON  EQUIVALENT SHARE

 

 

 

 

 

 

 

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

$            0.04  

 

$            (0.05)

 

$           0.08  

 

$            0.02  

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

$            0.04  

 

$            (0.05)

 

$            0.08  

 

$            0.02  

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF COMMON AND  COMMON EQUIVALENT SHARES OUTSTANDING

 

 

 

 

 

 

 

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

5,825,641  

 

5,825,641  

 

5,825,641  

 

5,935,919  

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

5,825,641  

 

5,825,641  

 

5,825,641  

 

5,941,091  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

4

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

 

 

Nine Months Ended June 30,

 

 

2002

 

2001

OPERATING  ACTIVITIES:

 

 

 

 

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

 

$       438,004  

 

$      120,096  

Adjustments to reconcile  net income to net cash provided by (used in)

 

 

 

 

operations:

 

 

 

 
        Loss on sale of property, plant and  equipment............................   
21,025  
   
9,745  

       Amortization of deferred  debt costs...........................................

 

--     

3,054  

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

 

95,497  

 

99,385  

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

 

--   

 

80,060  

     Changes in  operating assets and liabilities:

 

 

 

 

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

 

(554,658)

 

82,840  

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

 

(281,130)

 

78,490  

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

 

99,693  

 

57,494  

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

 

(15,435)

 

13,224  

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

 

202,725  

 

(368,064)

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

 

146,188  

 

(214,794)
         
NET CASH PROVIDED BY (USED  IN) OPERATING ACTIVITIES

 

151,909  

 

(38,470)
         
 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

   Proceeds from sale of property, plant and  equipment.....................

 

158,450  

 

15,243  

   Proceeds from repayments of notes and loans  receivable...............

 

--  

 

125,000  

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

 

18,864  

 

309,837  

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

 

(4,106)

 

(51,539)
         
NET CASH PROVIDED BY  INVESTING ACTIVITIES

 

173,208  

 

398,541  
         
 

 

 

 

 

CASH FLOW FROM FINANCING  ACTIVITIES:

 

 

 

 

   (Payments of) proceeds from short-term  borrowings......................

 

(900,000)

 

200,000  

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

 

(19,360)

 

(18,118)

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

 

-- 

 

(326,187)
         
NET CASH (USED IN)  FINANCING ACTIVITIES

 

(919,360)

 

(144,305)
         
 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES..............................

 

-- 

 

(8,798)
         
 

 

 

 

 

NET (DECREASE) INCREASE IN  CASH AND CASH EQUIVALENTS

 

(594,243)

 

206,968  

 

 

 

 

 

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

 

1,376,572  

 

840,532  
         
 

 

 

 

 

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

 

$         782,329  

 

$     1,047,500  
         
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

5

FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNINE MONTHS ENDED JUNE 30, 2002 AND 2001(UNAUDITED)

 

1.             BASIS OF PRESENTATION              

The accompanying unauditedcondensed consolidated financial statements have been prepared in accordancewith accounting 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 andnine-month periods ended June 30, 2002 are not necessarily indicative of theresults that may be expected for the fiscal year ending September 30, 2002.

The balance sheet at September 30, 2001 has been derived from the auditedconsolidated financial statements at that date, but does not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.

The accounting policies used in the preparation ofthis Form 10-QSB are the same as those set forth in the Company's annual reporton Form 10-KSB for the fiscal year ended September 30, 2001 and should be readin conjunction with the disclosures presented therein.  

Certain reclassifications of the prior period's financial statements havebeen made to conform to the current period's presentation.

The Company did not have any material amounts of comprehensive income other thannet income (loss).

Thisquarterly report contains forward-looking statements which involve certainrisks and uncertainties. Important factors could arise, including thosediscussed in Management's Discussion and Analysis of Financial Condition andResults of Operations set forth in this quarterly report on Form 10-QSB andthose identified in "Risk Factors" in the Company's annual report on Form10-KSB for the year ended September 30, 2001, which could cause the Company'sfuture operating results to differ materially from those contained in anyforward looking statement.  

2.             BORROWINGS UNDER CREDIT LINE

The Company, through a subsidiary, renewed itscredit facility with its bank effective March 31, 2002 until September 30,2002.  The credit facility provides fora maximum uncommitted line of credit totaling $2.5 million, including a $1.5million sublimit for direct borrowings and bankers acceptances, and a $1.0million sublimit for letters of credit. The credit line is renewable at the discretion of the bank and issecured by substantially all of the Company's assets. There are no financialratios or other restrictive covenants associated with the credit facility.  The Company is, however, required to submitto periodic bank examinations, obtain credit insurance on certain accountsreceivable and maintain performance acceptable to the bank.  Amounts drawn under the credit facility bearinterest at the banks prime rate in effect from time-to-time plus one quarterof one percent.  There are no fees inrespect of undrawn balances under the facility. At June 30, 2002, the Company had$600 thousand of direct borrowings under the credit facility and did not haveany commitments for outstanding letters of credit.

3.             BUSINESSSEGMENT 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, medicalequipment and computers. The Company's principal decision maker monitorsCompany performance by geographic locations. Geographic locations are determined based primarily on the location ofthe customer.   Information bygeographic location is as follows:

 

6

FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO FORM 10-QSBNINE MONTHS ENDED JUNE 30, 2002 AND 2001(UNAUDITED)

 

 

(All amounts in thousands  of dollars)

 

 

 

 

 

Three Months Ended June  30,

 

Nine Months Ended June 30,

**Sales**

2002

 

2001

 

2002

 

2001

     United States............................. 

$      1,815  

 

 $     1,553  

 

$      4,725  

 

$      4,368  

     Europe...................................... 

1,810  

 

786  

 

6,865  

 

5,508  

     Other........................................ 

426  

 

9  

 

690  

 

30  
            
          Total sales............................ 

$      4,051  

 

$      2,348  

 

$    12,280  

 

$      9,906  
            
 

 

 

 

 

 

 

 

**Operating income (loss)**

 

 

 

 

 

 

 

     United States............................ 

$        395  

 

$        (14)

 

$        487  

 

$           87  

     Europe..................................... 

321  

 

(14)

 

1,338  

 

1,573  

     Other....................................... 

160  

 

(5)

 

249  

 

(2)

     Corporate unallocated.............. 

(649)

 

(477)

 

(1,605)

 

(1,497)
            
          Income (loss) from operations

$        227  

 

$      (510)

 

$        469  

 

$        161  
                                    
**            Identifiable Assets:**

** **Identifiableassets by segment are as follows:  

 

(All amounts in thousands  of dollars)

 

June  30,

 

September  30,

 

2002

 

2001

 

 

 

 

      United  States.......................... 

$                    2,991

 

$                  3,341

      Europe................................... 

                      2,191

 

                    1,862

      Other..................................... 

                         406

 

                       112

      Corporate  unallocated............ 

                            --

 

                       406
      
           Total  assets........................

$                    5,588

$                  5,721

 

 

 

7

FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNINE MONTHS ENDED JUNE 30, 2002 AND 2001(UNAUDITED)

4.             EARNINGS PER SHARE

Basicearnings per share is computed using the weighted-average number of commonshares outstanding during each period. Diluted earnings per share is computedusing the weighted-average number of common and dilutive common-equivalentshares outstanding during the period. Dilutive common-equivalent shares consistof shares 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 and nine-month periods ended June 30, 2002were $0.84 and $0.92, respectively, which were below the exercise price of anyoptions outstanding. Accordingly, no exercise or dilution is presumed to haveoccurred.

Calculation ofearnings per share is as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended June  30,

 

Nine Months Ended June 30,

 

2002

 

2001

 

2002

 

2001

Numerator:

 

 

 

 

 

 

 

     Net income (loss)...................... 

$         248,711

 

 $       (305,535)

 

$         438,004

 

$           120,096

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

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

5,825,641

 

5,825,641

 

5,825,641

 

5,935,919

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

**

 

**

 

**

 

5,172
            
Denominator for diluted  earnings per share -      weighted average shares.......... 

5,825,641

 

5,825,641

 

5,825,641

 

5,941,091
            
 

 

 

 

 

 

 

 

Net income(loss)  per common share

 

 

 

 

 

 

 

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

$                 0.04

 

   $           (0.05)

 

$               0.08

 

$                0.02
            
      Diluted.................................... 

$                 0.04

 

   $           (0.05)

 

$               0.08

 

$                0.02
            
** Not included because the average stock price was below the exercise priceof all outstanding options and warrants.

5.             INCOME TAXES

The Company's income tax provision (benefit)consists of the following:

 

Three Months Ending June  30,

 

Nine Months Ending June  30,

US Federal and State

2002

 

2001

 

2002

 

2001

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

  $           33,700  

 

$       (203,690)

 

 $            29,100  

 

$            80,060

   Deferred.......... 

(33,700)

 

--  

 

   (29,100)

 

-- 

 

 

 

 

 

 

 

 

Foreign:

 

 

 

 

 

 

 

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

       12,400  

 

--  

 

 $            31,800  

 

-- 

   Deferred.......... 

(31,800)

 

--  

 

   (31,800)

 

-- 
            
Income  tax provision

$         (19,400)

 

$       (203,690)

 

$                    --

 

$            80,060
   
    
    
    
 
8

FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO FORM 10-QSBNINE MONTHS ENDED JUNE 30, 2002 AND 2001(UNAUDITED)

INCOME TAXES (CONTINUED)

In June 2001, the Company established a wholly owned foreign subsidiaryin Switzerland to engage in marketing and distribution activities throughoutEurope, the Middle East and Africa.  Inthe subsidiary's first partial fiscal year ended September 30, 2001, thesubsidiary generated net operating losses totaling $434,000.  Due to the uncertainty of the subsidiary'sability to generate sufficient taxable income to use those losses, the Companyestablished a full valuation allowance against the associated deferred taxasset.  For the nine months ended June30, 2002, the subsidiary has generated sufficient taxable income such that, itis more likely than not, the losses will be utilized. The Company has thereforereduced its valuation allowance to the extent that net operating loss carryforwards are expected to be utilized to offset current year's taxableincome.  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.  

6.             COMMITMENTS
Royalty Commitments
Effective January 1, 2001, the Company entered intoa license agreement with Motorola to sell certain Motorola branded productsdirectly to distributors and retailers located in the European, Middle East andAfrica ("EMEA") region. Under the termsof the license agreement, the Company is required to pay Motorola a royaltybased upon a percentage of the Company's net sales to third parties of licensedproducts within the EMEA Region. The license, as it has been amended, requiresthe Company to make minimum royalty payments to Motorola over three contractperiods as follows:

     1.       $850,000for the contract period July 1, 2001 to September 30, 2002,     2.       $960,000for the contract period October 1, 2002 to September 30, 2003 and     3.        $1,000,000 for the contractperiod October 1, 2003 to September 30, 2004.

Motorola has not guaranteed aminimum amount of revenues the Company will receive from the sale of thelicensed products, and the Company cannot guarantee that it will generatesufficient revenues to recoup the minimum royalty payments that the Company isobligated to pay to Motorola.  For thenine-month period ended June 30, 2002, the Company recorded sales ofapproximately $1.95 million from the sale of the licensed products and recordedroyalty expenses of $510 thousand.  TheCompany is currently engaged in negotiations with Motorola regarding certainaspects of the license agreement, including the minimum royalty amounts to bepaid by the Company to Motorola. To protect its rights under the licenseagreement consistent with its understanding of the terms thereof, while thosenegotiations are in progress, the Company issued a notice of termination of theagreement to Motorola on June 28, 2002 that will become effective September 30,2002 for contract periods two and three unless this notice is rescinded. As of June 30, 2002 the negotiations areongoing and, if resolved to the mutual satisfaction of both parties, it is theCompany's intention to rescind its termination notice and enter into a new oramended license agreement with Motorola. Although the Company believes that thenegotiations will be satisfactorily concluded, there can be no assurance thatsuch will be the case.
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 thepreliminary stage, but management believes the counterclaim is without merit andintends to vigorously defend the Company against these allegations.

9

FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO FORM 10-QSBNINE MONTHS ENDED JUNE 30, 2002 AND 2001(UNAUDITED)

PART I. ITEM 2:   MANAGEMENT'SDISCUSSION AND ANALYSIS OR PLAN OF OPERATION

                Thefollowing discussion and analysis should be read in conjunction with theCompany's Financial Unaudited 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.  TheCompany cautions that forward-looking statements are not guarantees of futureperformance and involve risks and uncertainties, (including those identified in"Risk Factors" in the Company's Form 10-KSB for the year ended September 30,2001) and that actual results may differ materially from the estimates orforecasts contained in the statements that constitute forward-looking statementsas a result of various factors.

               The following discussion and analysis compares the results of the Company'soperations for the Three and Nine months ended June 30, 2002, and the Three andNine months ended June 30, 2001. 

**Resultsof Operations for the Three Months Ended June 30, 2002 (the "2002 Quarter")Compared to the Three Months Ended June 30, 2001 (the "2001 Quarter")**

                Netincome in the 2002 Quarter was $249 thousand compared to a net loss of $306thousand in the 2001 Quarter, an increase of approximately $555 thousand.  Basic and diluted earnings per share fromoperations were $0.04 for the 2002 Quarter compared to a net loss per shareof  $0.05 in the 2001 Quarter.

**Sales and Gross Profit**

                Consolidated net sales increased approximately $1.70million or 73% to $4.05 million in the 2002 Quarter from $2.35 million in the2001 Quarter.  A large portion of the salesincrease was due to increased demand for the Company's line of diabeticmonitoring equipment carrying cases. The Company sells these cases to manufacturers of diabetic monitoringand testing equipment such as Bayer, Lifescan, Roche, Abbott Laboratories andTherasense.

                Sales of the Company's cellphone cases were also up in the 2002 Quarter as compared to the 2001 Quarter.Sales to Motorola, the Company's largest customer, increased approximately $780thousand in the 2002 Quarter and comprised approximately 19% of overall salesas compared to $660 thousand in the 2001 Quarter or 28% of the 2001 Quarter'soverall sales.  Additionally, under itslicensing agreement with Motorola, the Company sold approximately $685 thousandof Motorola branded products to third parties in the 2002 Quarter.  The Company is currently engaged innegotiations with Motorola regarding certain aspects of the license agreement,including the minimum royalty amounts to be paid by the Company to Motorola. Toprotect its rights under the license agreement consistent with itsunderstanding of the terms thereof, while those negotiations are in progress,the Company issued a notice of termination of the agreement to Motorola on June28, 2002 that will become effective September 30, 2002 for contract periods twoand three unless this notice is rescinded. As of June 30, 2002 the negotiations are ongoing and, if resolved to themutual satisfaction of both parties, it is the Company's intent to rescind itstermination notice or enter into a new license agreement with Motorola. Althoughthe Company believes the negotiations will be satisfactorily concluded, there isno such guarantee.

                Gross profit improved as a percentage of sales to 38%in the 2002 Quarter from 27% in the 2001 Quarter.  The improved gross profit percentage is attributed to a number ofinitiatives taken by the Company, including using more economical shippingmethods, reduced import duties (as a result of a favorable customs rulingreceived by the Company including refunds of duties previously paid totalingapproximately $120 thousand), and higher gross profit received from the sale oflicensed products.  Additionally, the relatively high fixed costs ofoperating the Company's Hong Kong inspection facility has been charged to costsof goods sold as incurred and the significantly higher sales volume in the 2002Quarter, compared to the 2001 Quarter, has resulted in a lower cost as apercentage of sales.

10

FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO FORM 10-QSBNINE MONTHS ENDED JUNE 30, 2002 AND 2001(UNAUDITED)

**Operating Income**

               Consolidated pretax income from operations increased approximately $738 thousandto a profit of $229 thousand in the 2002 Quarter, compared to a loss of $509thousand dollars in the 2001 Quarter. 

                Sellingexpenses increased $116 thousand; or approximately 20%, to $704 thousand in the2002 Quarter, from $588 thousand in the 2001 Quarter.  The increase is due primarily to Motorola royalty expenses of$170 thousand in the 2002 Quarter.  TheCompany had no such royalty expense in the 2001 Quarter.  The increase was partially offset by areduction of $68 thousand in travel expenses. The ratio of selling expenses tonet sales decreased to 17% in the 2002 Quarter, from approximately 25% in the2001 Quarter, due to the higher sales volume in the 2002 Quarter.  The Company expects selling expenses toremain significantly above historical levels due to royalties associated withthe Motorola licensing agreement and other expenses associated with theCompany's goal to expand its European sales capabilities.  

                General andadministrative expenses increased $67 thousand, or approximately 12%, to $627thousand in the 2002 Quarter, from $560 thousand in the 2001 Quarter.  The increase is primarily attributable toincreased legal and professional fees, including a $100 thousand payment madeby the Company in the 2002 Quarter as reimbursement of legal fees in connectionwith a settlement agreement entered into between the Company and ashareholder.  The increase was partiallyoffset by a foreign currency gain on the Company's euro denominated accountsreceivable.  The ratio of general and administrative expenses to net salesdecreased to approximately 16% in the 2002 Quarter, from approximately 24% inthe 2001 Quarter, due to the higher sales volume in the 2002 Quarter. 

**Other Income (Expense)**

               Changes in other income (expense) were immaterial.

**Income Taxes**

               The Company's benefit from income taxes of $19 thousand in the 2002 Quarter is aresult of the reduction of the Company's deferred tax valuation allowance as itrelates to a foreign subsidiary compared to a benefit of $204 thousand in the2001 quarter created by the 2001 Quarter's operating loss at the statutory rate.

**Result of Operations for the Nine Months EndedJune 30, 2002 (the "2002 Period") Compared to the Nine Months Ended June 30,2001 (the "2001 Period")**

                Net income increased $318thousand to $438 thousand in the 2002 Period compared to net income of $120thousand in the 2001 Period.  Basic anddiluted earnings per share increased to $0.08 in the 2002 Period compared to $0.02in the 2001 Period.

**Sales and Gross Profit**

                Consolidated net salesincreased approximately $2.37 million to $12.28 million, or 24%, in the 2002Period, from $9.91 million in the 2001 Period. The increase in the 2002 Period is primarily a result of increased demandfor the Company's diabetic monitoring equipment cases, as well as cell phonecases, as the Company's major customers launched new products.  

                Sales to Motorola, the Company's largest customer, wereapproximately $3.71 million in the 2002 Period and represented approximately30% of overall sales, as compared to $4.97 million in the 2001 Period, or 50%of the 2001 Period's overall sales. Additionally, under its licensing agreement with Motorola, the Companysold approximately $1.61 million of Motorola branded products to third partiesin the 2002 Period.  The Company had nosuch sales in the 2001 Period.  TheCompany had no such sales in the 2001 Quarter. As set forth in Note 6 tothe Financial Statements included in this Quarterly Report on Form 10-QSB, theCompany has given notice of termination of its license agreement to Motorola,effective September 30, 2002.

11

FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO FORM 10-QSBNINE MONTHS ENDED JUNE 30, 2002 AND 2001(UNAUDITED)

                Gross profit as a percentage of sales remained fairlyconsistent at 35% in the 2002 Period, compared to 34% in the 2001 Period. Increased expediting costs incurred in the Company's first quarter and slightlyhigher packaging costs throughout the 2002 Period were partially offset bysavings in subsequent quarters and refunds of approximately $200 thousand onpreviously paid customs and duties as a result of a favorable customs rulingobtained by the Company that allows it to import some of its products duty free.

**Operating Income**

               Consolidated pretax income from operations increased $238 thousand to $438thousand in the 2002 Period from $200 thousand in the 2001 Period. 

                Selling expenses increased$574 thousand, or approximately 36%, to $2.16 million in the 2002 Period, from$1.59 million in the 2001 Period, due primarily to royalty expenses of $510thousand in the 2002 Period as a result of its licensing agreement withMotorola. If the license agreement withMotorola (as it may be amended) continues in effect, the Company expects, thatif those negotiations are concluded to the mutual satisfaction of the parties,its selling expenses will remain significantly above historical levels due toroyalties associated with the agreement. The rest of the increase in sellingexpenses was primarily attributable to personnel costs that were $233 thousandhigher in the 2002 Period than the 2001 Period, partially offset by a $120thousand reduction in travel expenses.  The ratio of selling expenses to netsales increased to approximately 18% in the 2002 Period from approximately 16%in the 2001 Period.

                Generaland administrative expenses increased approximately $100 thousand or 6%, to$1.68 million, in the 2002 Period from $1.58 million in the 2001 Period, dueprimarily to higher professional fees.

**Other Income (Expense)**

            Interestexpense increased by approximately $30 thousand in the 2002 Period as a resultof higher average borrowings under the Company's credit line.   Interest income decreased by approximately$30 thousand in the 2002 Period as the Company had lower levels of officerloans outstanding, lower average cash balances and lower interest earnings onthose cash balances.   Other income (expense) - net, decreased $10thousand to income of $3 thousand in the 2002 Period from income ofapproximately $13 thousand in the 2001 Period. 

**Income Taxes**

                The provision for income taxes decreased $80 thousandto $0 in the 2002 Period, from $80 thousand in the 2001 Period, due primarilyto lower pre-tax operating income.  The 2002 Period's taxes were also loweras the Company did not provide for domestic income taxes on the undistributedearnings of its newly created Swiss subsidiary, as it considers those earningspermanently invested.

**Liquidity and Capital Resources**

**               **In the 2002 Period,operating activities generated $152 thousand of operating cash flows, comparedto using $38 thousand in the 2001 Period. The 2002 operating cash flows resulted primarily from net income of $438thousand, adjusted for non-cash items including depreciation and amortizationexpenses of $95 thousand.  The increases in accounts receivable andinventory of $555 thousand and  $281 thousand, respectively, were a resultof higher sales and were partially offset by increases in accounts payable of$203 thousand, accrued expenses of $146 thousand and decreases in prepaidexpenses of $100 thousand. 

                Net investing activities in the 2002 Period generatedcash of $173 thousand, compared to $398 thousand in the 2001 Period.  The major component of the 2002 Period wasthe sale of the Company's South Bend facility.  The 2001 Period includedcash collected of $125 thousand as repayment of a note receivable and $310thousand from the repayment of an officer's loan, which were partially offset bypurchases of capital equipment totaling $52 thousand.

12

FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO FORM 10-QSBNINE MONTHS ENDED JUNE 30, 2002 AND 2001(UNAUDITED)

 

               Financing activities used $919 thousand in cash in the 2002 Period, compared to$144 thousand in the 2001 Period.  The Company repaid $900 thousand of itscredit line in the 2002 Period leaving a $600 thousand balance outstanding atJune 30, 2002, compared to borrowing an additional $200 thousand under theCompany's line of credit in the 2001 Period.  The 2001 Period also includedtreasury stock purchases totaling $326 thousand. 

                AtJune 30, 2002, the Company's current ratio (current assets divided by currentliabilities) was 2.29 and its quick ratio (current assets less inventoriesdivided by current liabilities) was 1.83. The Company's long-term debt consistedof approximately $66 thousand owed on capital leases. 

                The Company's principalsources of liquidity are its cash flow from operations and its bank line ofcredit. In the 2002 Period, the Company was dependent on four key customers forthe majority of its operating cash flows. Sales to Motorola, Abbott Laboratories, Therasense and Lifescan,including their subsidiaries or affiliates, generated approximately 60% of the Company'srevenues and represented approximately 50% of the Company's accounts receivableat June 30, 2002.  The loss of one or more of these significant customers bythe Company, or their failure to pay the Company, could have a material adverseaffect on the Company's liquidity.

                TheCompany, through a subsidiary, renewed its credit facility with its bankeffective March 31, 2002 until September 30, 2002.  The credit facility provides for a maximum uncommitted line ofcredit totaling $2.5 million, including a $1.5 million sublimit for direct borrowingsand bankers acceptances and $1.0 million sublimit for letters of credit.  The credit line is renewable at thediscretion of the bank and is secured by substantially all of the Company'sassets.  There are no financial ratios or other restrictive covenants associatedwith the credit facility.  The Companyis, however, required to submit to periodic bank examinations, obtain creditinsurance on certain accounts receivable and maintain performance acceptable tothe bank.  Amounts drawn under thecredit facility bear interest at the prime rate in effect from time-to-timeplus one quarter of one percent.  Thereare no fees payable in respect of undrawn balances under the credit facility.This is an uncommitted line of credit and there is no guarantee the bank willgrant additional cash advances under the line of credit to the Company ifrequired, or that the Company's performance will remain satisfactory to thebank or that the bank will renew the credit facility.  Although management believes that it could obtain alternatefinancing in the event of a loss of its current facility, there can be noassurance that such financing could be obtained and the failure to do so couldhave a material adverse affect on the Company's liquidity. At June 30, 2002, theCompany had $600 thousand of direct borrowings under the credit facility and didnot have any commitments for outstanding letters of credit.

                The Company has entered intoemployment agreements with three of its executive officers and a consultingagreement with its former chairman. These agreements expire at different times through December 31,2004.  Such agreements provide forminimum salary levels, incentive bonuses that are payable if specifiedmanagement goals are attained and other benefits. The aggregate commitment forfuture payments at June 30, 2002, excluding bonuses and other benefits, wasapproximately $1.3 million.  Under certain conditions, as defined in theagreements, the executives may terminate their respective agreements and receivea lump sum payment equivalent to their remaining base salary plus their prioryear's bonus.

                Under the terms of its license agreement withMotorola, 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, as it has been amended, requires theCompany to make minimum royalty payments to Motorola over three contractperiods as follows:

     1.       $850,000 for thecontract period July 1, 2001 to September 30, 2002,      2.       $960,000 for thecontract period October 1, 2002 to September 30, 2003, and      3.        $1,000,000 for the contractperiod October 1, 2003 to September 30, 2004.

                Motorola has not guaranteed a minimum amount of revenues the Company willreceive from the sale of the licensed products, and the Company cannot guaranteethat it will generate sufficient revenues to recoup the minimum royalty paymentsthat the Company is obligated to pay to Motorola. In the 2002 Period, the Companyrecorded sales of approximately $1.6 million from the sale of the licensedproducts to third parities and recorded royalty expenses of $510 thousand. The Company is currently engaged in negotiations with Motorola regarding certainaspects of the license agreement, including the minimum.

13

FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO FORM 10-QSBNINE MONTHS ENDED JUNE 30, 2002 AND 2001(UNAUDITED)

 

 

royalty amounts to be paid by the Company to Motorola. To protect itsrights under the license agreement consistent with its understanding of theterms thereof, while those negotiations are in progress, the Company issued anotice of termination of the agreement to Motorola on June 28, 2002 that willbecome effective September 30, 2002 for contract periods two and three unlessthis notice is rescinded.  As of June 30, 2002 the negotiations are ongoingand, if resolved to the mutual satisfaction of both parties, it is the Company'sintent to rescind its termination notice or enter into a new license agreementwith Motorola. Although the Company believes the negotiations will besatisfactorily concluded, there is no such guarantee.  There also can be noassurance that, if the negotiations with Motorola are not successful, and thelicense agreement is terminated, Motorola will continue to purchase theCompany's products in transactions not subject to the license agreement. Sales of Motorola products under the license agreement and to Motorola directlyfor the three and nine months ended June 30, 2002, were 36% and 43%respectively, of net sales.  The loss of Motorola as a customer will have amaterial adverse affect on the Company's results of operations and financialcondition.

               The Company did not incur any long-term debt in the 2002 Period and at June 30,2002 there was no long-term debt other than capital lease obligationsoutstanding.

**Contractual Obligations and Commercial Commitments**

The Company has entered into various contractual obligationsand commercial commitments that, under accounting principles generally acceptedin the United States, are not recorded as a liability.   The followingis a summary of such contractual cash obligations as of June 30, 2002:

                                                                                

**Contractual Obligation or Commitment**

**Jul 02 - Jun 03**

**Jul 03- Jun 05**

**Jul 05 - Jun 07**

**Thereafter**

Employment & Consulting Agreements

$   782,000

$   503,000

$              0

$              0

Operating Leases

                255,000

                329,000

223,000

0

License Agreements**

                890,000

1,240,00

0

0

**Totals**

$1,927,000

$2,072,000

$  223,000

$              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 which, as previously disclosed herein, has beenterminated effective September 30, 2002 but is presently under negotiation. 

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

PART II.               OTHER INFORMATION

ITEM 1.                 LEGAL PROCEEDINGS

        None.

ITEM 2.                 CHANGES IN SECURITIES

        None.

ITEM 3.                 DEFAULTS UPON SENIORSECURITIES

        None.

14

FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO FORM 10-QSBNINE MONTHS ENDED JUNE 30, 2002 AND 2001(UNAUDITED)

 

ITEM 4.                  SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS

The Company held its Annual Meeting ofStockholders on May 24, 2002.  Thefollowing matters were voted upon at the Annual Meeting of Shareholders:

1.       Electionof a Board of Directors

 
 

 

Number of Shares Voted

Name

 

For

 

Against

 

Abstain

 
Jerome E Ball................. 

 

5,005,532

 

22,244

 

--

 
Bruce Galloway.............. 

 

5,005,532

 

22,244

 

--

 
Jeffrey Kuhr................... 

 

5,005,532

 

22,244

 

--

 
Norman Ricken..............

 

5,005,532

 

22,244

 

--

 
Michael Schiffman ..........

 

5,005,532

 

22,244

 

--

 
Theodore H Schiffman..... 

 

5,005,409

 

22,367

 

--

 

2.       Ratificationof Ernst & Young LLP as the independent auditors and accountants for theCompany for the Fiscal Year ending September 30, 2002.

 

 

Number of  Shares Voted

 

 

For

 

Against

 

Abstain

Ratify Ernst & Young LLP as the Company's  Auditor for the Fiscal Year ending September 30, 2002. 

 

4,962,284

 

3,525

 

61,967

ITEM 5.         OTHER INFORMATION

            None. 

ITEM 6.       EXHIBITS AND REPORTS 

(a) Exhibits filed herewith:            None

(b) Reports on Form 8-K 

        For the three month period ended June 30, 2002 the Companyfiled the following current reports on Form 8-K:

The Company's Current Report filed April 26, 2002 on Form 8-K, Item 5,relating to the receipt of notification from the NASDAQ stock market of theCompany's failure to maintain the minimum bid price requirement for continuedlisting.

The Company's Current Report filed April 16, 2002 as amended on April 25,2002, on Form 8-K, Item 5, relating to settlement of certain disagreements witha shareholder.

The Company's Current Reportfiled April 4, 2002 on Form 8-K, Item 5, relating to the date of the Company'sannual shareholders meeting.  

 

15

FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO FORM 10-QSBNINE MONTHS ENDED JUNE 30, 2002 AND 2001(UNAUDITED)

SIGNATURE

In accordance with the requirements of the Exchange Act, the registrant hascaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

Dated:  July 26, 2002 

 
 FORWARD INDUSTRIES, INC. (Registrant)     By:/s/  Jerome E. Ball          * * Jerome E. Ball   Chairman and Chief Executive Officer     By: /s/  Douglas W. Sabra           Douglas W. Sabra    Vice President and Chief Financial Officer     (Mr. Sabra is the Principal Financial      and Accounting Officer and has been duly authorized to sign on behalf of the registrant.)  
                                                                                                       

 

 

16