**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

** FORM 10-QSB**

** **(Mark One)

[X]       QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934              for the quarterly period ended March31, 2003.

or

[   ]       TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934              for the transition periodfrom  ____ to ____

Commission file number 0-6669

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

| New York                                                             |   | 13-1950672      |
|----------------------------------------------------------------------|--------|------------------------------------------|
| (State or other jurisdiction  of incorporation or organization) |   | (I.R.S. Employer Identification No.)     |
|                                                                 |   |                                          |
|                                                                 |   |                                          |
|                                                                 |   |                                          |
| 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 addressand 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 theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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 April 22, 2003,5,780,441shares of Common Stock were outstanding.

TransitionalSmall Business Disclosure Format:    Yes[   ] No [X] 

** **

 1

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** **

**FORWARD INDUSTRIES, INC. ANDSUBSIDIARIESFORM10-QSBTHREE AND SIX MONTH PERIODSENDED MARCH 31, 2003 CONTENTS**

 

|             |            |                                                                                                                                                                                                                             | PAGE       |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **PART I**  | ** ** | **FINANCIAL  INFORMATION**                                                                                                                                                                                                  | ** ** |
|             |            |                                                                                                                                                                                                                             |       |
|             | Item 1.    | Financial  statements                                                                                                                                                                                                       |       |
|             |            |     Consolidated Balance Sheets as of March  31, 2003 (Unaudited)                                                                                                                                            |       |
|             |            |     and September 30, 2002............................................................................................................                                                                       | 3          |
|             |            |                                                                                                                                                                                                                             |       |
|             |            |      Unaudited Consolidated Statements of  Income for the Three and Six                                                                                                                                      |       |
|             |            |     Months Ended March 31, 2003 and 2002..............................................................................                                                                                       | 4          |
|             |            |                                                                                                                                                                                                                             |       |
|             |            |      Unaudited Consolidated Statements of Cash  Flows for the Six                                                                                                                                            |       |
|             |            |     Months Ended March 31, 2003 and 2002..............................................................................                                                                                       | 5          |
|             |            |                                                                                                                                                                                                                             |       |
|             |            |     Notes to Consolidated Financial  Statements.......................................................................                                                                                       | 6          |
|             |            |                                                                                                                                                                                                                             |       |
|             | Item 2.    | Management's  Discussion and Analysis of Financial Condition and Results of Operations..................................................................................................................................... | 13         |
|             |            |                                                                                                                                                                                                                             |       |
|             | Item 3.    | Controls  and Procedures.............................................................................................................                                                                                       | 20         |
|             |            |                                                                                                                                                                                                                             |       |
| **PART II** | ** ** | **OTHER  INFORMATION**                                                                                                                                                                                                      | ** ** |
|             |            |                                                                                                                                                                                                                             |       |
|             | Item 1.    | Legal  Proceedings........................................................................................................................                                                                                  | 21         |
|             |            |                                                                                                                                                                                                                             |       |
|             | Item 2.    | Changes  in Securities...................................................................................................................                                                                                   | 21         |
|             |            |                                                                                                                                                                                                                             |       |
|             | Item 3.    | Defaults  upon Senior Securities.................................................................................................                                                                                           | 21         |
|             |            |                                                                                                                                                                                                                             |       |
|             | Item 4.    | Submission  of Matters to a Vote of Security Holders............................................................                                                                                                            | 21         |
|             |            |                                                                                                                                                                                                                             |       |
|             | Item 5.    | Other  Information.........................................................................................................................                                                                                 | 21         |
|        |       |                                                                                                                                                                                                                        |       |
|             | Item 6.    | Exhibits  and Reports on Form 8-K.............................................................................................                                                                                              | 21         |
|             |            |                                                                                                                                                                                                                             |       |
|             |            | Signatures......................................................................................................................................                                                                            | 22         |
|             |            |                                                                                                                                                                                                                             |       |
|             |            | Certifications.................................................................................................................................                                                                             | 23         |
|             |            | .                                                                                                                                                                                                                           |       |

**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

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ITEM 1.  FINANCIAL STATEMENTS

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

|                                                                                                                                                                                                                                                                         |                                    |   |                                 |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------|--------|--------------------------------------|
|                                                                                                                                                                                                                                                                         |                                    |   |                                 |
|                                                                                                                                                                                                                                                                         | March 31,                               |   | September 30,                        |
|                                                                                                                                                                                                                                                                         | 2003                                    |   | 2002                                 |
| **ASSETS**                                                                                                                                                                                                                                                                   | (Unaudited)                             |   |                                 |
| ** **                                                                                                                                                                                                                                                                   |                                    |   |                                 |
| Current assets:                                                                                                                                                                                                                                                              |                                    |   |                                 |
|    Cash and cash equivalents............................................................................................                                                                                                                                           | $   1,564,786                 |   |  $     1,207,311 |
|    Accounts receivable - net .............................................................................................                                                                                                                                         | 2,406,221                               |   | 2,680,916                            |
|    Inventories........................................................................................................................                                                                                                                             | 1,111,128                               |   | 718,986                              |
|    Prepaid expenses and other current assets.................................................................                                                                                                                                                      | 239,034                                 |   | 219,124                              |
|    Deferred tax asset............................................................................................................                                                                                                                                  | 15,500                                  |   | 15,500                               |
|       Total current assets......................................................................................................                                                                                                                    | 5,336,669                               |   | 4,841,837                            |
|                                                                                                                                                                                                                                                                              |                                    |   |                                 |
| Property, plant and equipment -  net................................................................................                                                                                                                                                         | 315,057                                 |   | 341,187                              |
| Deferred tax asset...............................................................................................................                                                                                                                                            | 161,700                                 |   | 164,500                              |
| Other assets.........................................................................................................................                                                                                                                                        | 41,337                                  |   | 41,337                               |
|      **TOTAL ASSETS**...........................................................................................................                                                                                                                         | $   5,854,763                 |   |  $     5,388,861 |
|                                                                                                                                                                                                                                                                              |                                    |   |                                 |
| **LIABILITIES AND STOCKHOLDERS' EQUITY**                                                                                                                                                                                                                                     |                                    |   |                                 |
|                                                                                                                                                                                                                                                                              |                                    |   |                                 |
| Current liabilities:                                                                                                                                                                                                                                                         |                                    |   |                                 |
|    Accounts payable...........................................................................................................                                                                                                                                     | $      926,803 |   |  $     1,306,381 |
|    Accrued expenses and other current  liabilities...........................................................                                                                                                                                                      | 455,190                                 |   | 291,984                              |
|    Current portion of capital lease  obligations................................................................                                                                                                                                                   | 28,752                                  |   | 27,814                               |
|       Total current liabilities.................................................................................................                                                                                                                    | 1,410,745                               |   | 1,626,179                            |
|                                                                                                                                                                                                                                                                              |                                    |   |                                 |
| Long term portion of capital  lease obligations...............................................................                                                                                                                                                               | 44,136                                  |   | 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 506,090 and  460,890 shares, respectively, held in       treasury)......................................................................................................................... | 62,865                                  |   | 62,865                               |
|    Paid-in capital...................................................................................................................                                                                                                                              | 8,251,780                               |   | 8,251,780                            |
|    Accumulated deficit........................................................................................................                                                                                                                                     | (3,178,550)                             |   | (3,928,827)                          |
|                                                                                                                                                                                                                                                                              | 5,136,095                               |   | 4,385,818                            |
|    Less: Cost of shares in treasury....................................................................................                                                                                                                                            | (736,213)                               |   | (681,887)                            |
|       Total stockholders' equity...........................................................................................                                                                                                                         | 4,399,882                               |   | 3,703,931                            |
|                                                                                                                                                                                                                                                                              |                                    |   |                                 |
| **TOTAL  LIABILITIES AND STOCKHOLDERS' EQUITY**........................................                                                                                                                                                                                      | $   5,854,763                 |   |  $     5,388,861 |

 

The accompanying notes arean integral part of the consolidated financial statements

3

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**FORWARD INDUSTRIES, INC. ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OFINCOME(UNAUDITED)**

** **

|                                                                                                                                           |   | Three Months Ended                                           |   | Six  Months Ended                                                  |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------|--------|--------------------------------------------------------------------|
|                                                                                                                                           |   | March 31,                                                    |   | March  31,                                                         |
|                                                                                                                                           |   | 2003                                                         |   | 2002                                                               |   | 2003 |   | 2002 |
| Net sales...............................................................................                                                  |   | $   3,903,559                                      |   | $   3,851,603                                            |   | $   9,595,200 |   | $    8,228,676 |
| Cost of goods sold..............................................................                                                          |   | 2,704,059                                                    |   | 2,551,179                                                          |   | 6,555,681 |   | 5,477,126 |
| Gross profit...........................................................................                                                   |   | 1,199,500                                                    |   | 1,300,424                                                          |   | 3,039,519 |   | 2,751,550 |
|                                                                                                                                           |        |                                                         |   |                                                               |   |   |   |   |
| Operating expenses:                                                                                                                       |        |                                                         |   |                                                               |   |   |   |   |
|      Selling...............................................................................                           |   | 577,589                                                      |   | 701,083                                                            |   | 1,252,008 |   | 1,456,299 |
|      General and administrative............................................                                           |   | 499,371                                                      |   | 515,134                                                            |   | 1,119,359 |   | 1,037,037 |
|           Total operating  expenses.........................................                 |   | 1,076,960                                                    |   | 1,216,217                                                          |   | 2,371,367 |   | 2,493,336 |
|                                                                                                                                           |        |                                                         |   |                                                               |   |   |   |   |
| Income from operations......................................................                                                              |   | 122,540                                                      |   | 84,207                                                             |   | 668,152 |   | 258,214 |
|                                                                                                                                           |        |                                                         |   |                                                               |   |   |   |   |
| Other income (expense):                                                                                                                   |        |                                                         |   |                                                               |   |   |   |   |
|      Interest expense..............................................................                                   |   | (1,288)                                                      |   | (14,230)                                                           |   | (2,689) |   | (35,876) |
|      Interest income................................................................                                  |   | 1,702                                                        |   |  3,938                                                        |   | 4,838 |   |       11,253 |
|      Other income (expense)..................................................                                         |   | 59,579                                                       |   | (20,360)                                                           |   | 96,376 |   | (24,898) |
|           Total other income (expense)...................................                    |   | 59,993                                                       |   | (30,652)                                                           |   | 98,525 |   | (49,521) |
|                                                                                                                                           |        |                                                         |   |                                                               |   |   |   |   |
| Income before provision for income taxes.......................                                                                           |   | 182,533                                                      |   | 53,555                                                             |   | 766,677 |   | 208,693 |
| Provision (benefit) for income taxes.................................                                                                     |   | (8,600)                                                      |   | 2,500                                                              |   | 16,400 |   | 19,400 |
|                                                                                                                                           |        |                                                         |   |                                                               |   |   |   |   |
| Net income ...........................................................................                                                    |   | $     191,133                                 |   | $       51,055                       |   | $      750,277 |   | $     189,293 |
|                                                                                                                                           |        |                                                         |   |                                                               |   |   |   |   |
| Net income per common and common equivalent  share                                                                                        |        |                                                         |   |                                                               |   |   |   |   |
|           Basic............................................................................  |   | $          0.03 |   | $           0.01 |   | $            0.13 |   | $            0.03 |
|           Diluted.........................................................................   |   | $          0.03 |   | $           0.01 |   | $            0.13 |   | $            0.03 |
|                                                                                                                                           |        |                                                         |   |                                                               |   |   |   |   |
| Weighted average number of common and    common equivalent shares outstanding                                                   |        |                                                         |   |                                                               |   |   |   |   |
|           Basic............................................................................. |   | 5,783,774                                                    |   | 5,825,641                                                          |   | 5,798,841 |   | 5,825,641 |
|           Diluted..........................................................................  |   | 5,953,929                                                    |   | 5,825,641                                                          |   | 5,883,918 |   | 5,825,641 |
|                                                                                                                                           |        |                                                         |   |                                                               |   |   |   |   |
|                                                                                                                                           |   |                                                         |   |                                                               |   |   |   |   |

4

Theaccompanying notes are an integral part of the consolidated financialstatements.

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

|                                                                                                                                                                                                           | Six Months Ended March 31,              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------|
|                                                                                                                                                                                                           |      2003           |   | 2002 |
| CASH  FLOW FROM OPERATING ACTIVITIES:                                                                                                                                                                     |                                         |   |  |
|      Net income....................................................................................................................                                                   | $      750,277 |   | $        189,293 |
|      Adjustments to reconcile  net income to net cash provided           by operating activities:                                        |                                         |   |  |
|           Loss on sale  of property, plant and equipment.................................................                                                    | 7,057                                   |   | -- |
|           Depreciation  and amortization..............................................................................                                       | 65,681                                  |   | 63,641 |
|           Deferred  taxes.........................................................................................................                           | 2,800                                   |   | -- |
|           Write down of  assets held for sale......................................................................                                          | --                                      |   | 25,000 |
|             Changes in operating assets and liabilities:                                                                                                |                                         |   |  |
|                Accounts receivable.........................................................................................         | 274,695                                 |   | (8,112) |
|                Inventories......................................................................................................... | (392,142)                               |   | (498,138) |
|                Prepaid expenses and other  current assets...................................................                        | (19,911)                                |   | 118,024 |
|                Other assets.......................................................................................................  | --                                      |   | (2,379) |
|                Accounts payable.............................................................................................        | (379,578)                               |   | 262,423 |
|                Accrued expenses and other  current liabilities.............................................                         | 163,206                                 |   | (26,689) |
| NET CASH  PROVIDED BY OPERATING ACTIVITIES.............................................                                                                                                                   | 472,085                                 |   | 123,063 |
|                                                                                                                                                                                                           |                                         |   |  |
| CASH FLOW FROM INVESTING  ACTIVITIES:                                                                                                                                                                     |                                         |   |  |
|      Proceeds from sale of  property, plant and equipment............................................                                                                                 | 3,591                                   |   | -- |
|      Proceeds from officer loan  repayments.....................................................................                                                                      | --                                      |   | 10,634 |
|      Purchases of property,  plant and equipment............................................................                                                                          | (50,198)                                |   | (2,069) |
| NET CASH (USED IN)  PROVIDED BY INVESTING ACTIVITIES.............................                                                                                                                         | (46,607)                                |   | 8,565 |
|                                                                                                                                                                                                           |                                         |   |  |
| CASH FLOW FROM FINANCING  ACTIVITIES:                                                                                                                                                                     |                                         |   |  |
|      Payments of short-term  borrowings............................................................................                                                                   | --                                      |   | (500,000) |
|      Principal payments on  capital lease obligations........................................................                                                                         | (13,677)                                |   | (12,799) |
|      Purchase of treasury  shares..........................................................................................                                                           | (54,326)                                |   | -- |
| NET CASH USED IN FINANCING ACTIVITIES............................................................                                                                                                         | (68,003)                                |   | (512,799) |
|                                                                                                                                                                                                      |                                         |   |  |
| NET INCREASE (DECREASE) IN  CASH AND CASH EQUIVALENTS                                                                                                                                                     | 357,475                                 |   | (381,171) |
|                                                                                                                                                                                                      |                                         |   |  |
| CASH AND CASH  EQUIVALENTS - beginning of period..........................................                                                                                                                | 1,207,311                               |   | 1,376,572 |
|                                                                                                                                                                                                      |                                         |   |  |
| CASH AND CASH EQUIVALENTS  - end of period.....................................................                                                                                                           | $    1,564,786           |   | $        995,401 |
|                                                                                                                                                                                                      |                                         |   |  |  
Theaccompanying notes are an integral part of the consolidated financialstatements.

 

5

 

**FORWARD INDUSTRIES,INC. AND SUBSIDIARIESNOTES TO FINANCIALSTATEMENTSMARCH 31, 2003(UNAUDITED) **

 

1.          BASIS OF PRESENTATION

The accompanying unauditedconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States for interim financialinformation and with the Securities and Exchange Commission instructions toForm 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotesrequired by accounting principles generally accepted in the United States forcomplete financial statements.  In theopinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a fair presentation have been included.  Operating results for the three and six-monthperiods ended March 31, 2003 are not necessarily indicative of the results thatmay be expected for the fiscal year 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.

TheCompany did not have any material components of other comprehensive incomeother than net income.

This quarterly reportcontains forward-looking statements which involve certain risks anduncertainties. Important factors could arise, including those discussed inManagement's Discussion and Analysis of Financial Condition and Results ofOperations set forth in this quarterly report on Form 10-QSB and thoseidentified in "Risk Factors" in the Company's annual report on Form 10-KSB forthe year ended September 30, 2002, which could cause the Company's futureoperating results to differ materially from those set forth in any forwardlooking statement.  

**Recent AccountingPronouncements**

In August 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 beDisposed Of*(FAS 121); however it retains the fundamental provisions ofthat statement 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 Operations-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 an impact on the Company'scurrent financial position or results of operations.

6

 

**FORWARD INDUSTRIES,INC. AND SUBSIDIARIESNOTES TO FINANCIALSTATEMENTSMARCH 31, 2003(UNAUDITED) **

**Recent AccountingPronouncements  (continued)**

In April 2002, the FASB issued SFAS No. 145, *Rescissionof FASB Statements Nos. 4, 44 and 62, Amendment of SFAS No. 13 and TechnicalCorrections*. For most companies, SFAS 145 will require gains and losses onextinguishments of debt to be classified as income or loss from continuingoperations rather than as extraordinary items as previously required under SFAS4. Extraordinary treatment was required for certain extinguishments as providedin APB Opinion No. 30. The statement also amended SFAS 13 for certainsale-leasebacks and sublease accounting. We adopted the provisions of SFAS 145effective October 1, 2002. The adoption of SFAS 145 did not have animpact on the results of operations or financial position of the Company.

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 business combinationor with a disposal activity covered by SFAS No. 144, *Accounting for theImpairment or Disposal of Long-Lived Asse*ts. These costs include, but arenot limited to: termination benefits provided to current employees that areinvoluntarily 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 was adopted effective January 1, 2003 and its application didnot have an impact on the Company's current financial position or results ofoperations.

On December 31, 2002, the FASB issued SFASNo. 148, *Accounting for Stock-Based Compensation - Transition and Disclosure*.  SFAS 148 amends FASB Statement No. 123, *Accountingfor Stock-Based Compensation*, to provide alternative methods of transitionto SFAS 123's fair value method of accounting for stock-based employeecompensation.  SFAS 148 also amends thedisclosure provisions of SFAS 123 and APB Opinion No. 28, *Interim FinancialReporting*, to require disclosure in the summary of significant accountingpolicies of the effects of an entity's accounting policy with respect tostock-based employee compensation on reported net income and earnings per sharein annual and interim financial statements. While SFAS 148 does not amend SFAS 123 to require companies to accountfor employee stock options using the fair value method, the disclosureprovisions of SFAS 148 are applicable to all companies with stock-basedemployee compensation, regardless of whether they account for that compensationusing the fair value method of SFAS 123 or the intrinsic value method of APBOpinion 25.  The Company adopted therequired disclosure provisions of SFAS No. 148 effective January 1, 2003, andits application did not have an impact on the Company's current financialposition or results of operations

In November 2002, the FASBissued Interpretation No. 45, *"Guarantor's Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers"* (*"FIN 45"*). FIN 45 requires that certainguarantees be initially recorded at fair value, which is different from thegeneral current practice of recording a liability only when a loss is probableand reasonably estimable. FIN 45 also requires a guarantor to make significantnew disclosures for virtually all guarantees. The Company adopted thedisclosure requirements under FIN 45 for the quarter ended March 31, 2003 andwill adopt the initial recognition and initial measurement provisions for anyguarantees issued or modified after March 31, 2003. The adoption of FIN 45 isnot expected to have a material impact on the results of operations orfinancial position of the Company.

 

7

 

**FORWARD INDUSTRIES,INC. AND SUBSIDIARIESNOTES TO FINANCIALSTATEMENTSMARCH 31, 2003(UNAUDITED) **

**Recent AccountingPronouncements  (continued)**

In January 2003, the FASB issuedInterpretation No. 46, *"Consolidation of Variable Interest Entities -an Interpretation of ARB No. 51"* (*"FIN 46"*), whichaddresses consolidation of variable interest entities. FIN 46 expands thecriteria for consideration in determining whether a variable interest entityshould be consolidated by a business entity, and requires existingunconsolidated variable interest entities (which include, but are not limitedto, Special Purpose Entities, or SPEs) to be consolidated by their primarybeneficiaries if the entities do not effectively disperse risks among partiesinvolved. This interpretation applies immediately to variable interest entitiescreated after January 31, 2003, and to variable interest entities in which anenterprise obtains an interest after that date. It applies in the first fiscalyear or interim period beginning after June 15, 2003, to variable interestentities in which an enterprise holds a variable interest that it acquiredbefore February 1, 2003. The adoption of FIN 46 is not expected to have amaterial impact on the results of operations or financial position of theCompany.

2.          CREDIT FACILITIES

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 March 31, 2003) ineffect 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. There have been no drawings or payments during the six months endedMarch 31, 2002 and at March 31, 2003, there were no outstanding borrowings orletters of credit obligations under this facility.

In February 2003, the Company, through a foreignsubsidiary, established an additional credit facility with a bank that providesfor a maximum uncommitted line of credit of $400,000.  Amounts borrowed under the facility may bestructured as either term loans, with a maximum repayment period of 12 months,or as a guarantee facility, or any combination of the foregoing.  The bank or the Company may terminate thefacility at any time; however, such termination would not affect the statedmaturity of term loans outstanding. Amounts borrowed as a revolving line of credit must be settled quarterlyor converted into term loans.  Anintercompany balance owed by the subsidiary to the Company secures borrowingsunder the line and the subsidiary has agreed to certain covenants.  Amounts drawn under this credit facility bearinterest at variable rates established by the bank (5.1% as of March 31,2003).  Additionally, the Company pays acredit commission of 0.25% of the maximum amount of credit used during aquarter. This credit facility has not been used, therefore, at March 31, 2003there were no outstanding borrowings under this credit facility.

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 and medicalequipment.  Geographic locations aredetermined based primarily on the location of the customer.   Information by geographic location is asfollows:

 

8

 

**FORWARD INDUSTRIES,INC. AND SUBSIDIARIESNOTES TO FINANCIALSTATEMENTSMARCH 31, 2003(UNAUDITED) **

**Revenues from external customers (all amountsin $000):**

Three Months Ended

 

Six Months Ended

March 31,

 

March 31,

2003

 

2002

 

2003

 

2002

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

$   2,596

 

$   1,296

 

$    5,676

 

$   2,910

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

1,195

 

2,292

 

3,520

 

5,054

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

113

 

264

 

399

 

265

Total net sales................ 

$   3,904

 

$  3,852

 

$   9,595

 

$   8,229

4.          EARNINGS PER SHARE

Basic earningsper share is computed using the weighted-average number of shares of commonstock 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 six-month periods ended March 31, 2002were $0.95 and $0.97, respectively, which were below the exercise price of anyoptions outstanding. Accordingly, no exercise or dilution is presumed to haveoccurred in those periods.

Calculation of earnings per share is asfollows:

 

Three Months Ended March  31,

 

Six Months Ended March 31,

 

2003

 

2002

 

2003

 

2002

Numerator:

 

 

 

 

 

 

 

 

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

 

$        191,133

 

$           51,055

 

$      750,277

 

$        189,293

Denominator:

 

 

 

 

 

 

 

 

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

 

5,783,774

 

5,825,641

 

 5,798,841

 

5,825,641

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

 

170,155

 

**

 

85,077

 

**

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

 

5,953,929

 

5,825,641

 

5,883,918

 

5,825,641

Net income per common share

 

 

 

 

 

 

 

 

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

$               0.03

 

$                0.01

 

$               0.13

 

$                0.03

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

$               0.03

 

$                0.01

 

$               0.13

 

$                0.03

Shares excluded due to  antidilution

1,594,625

 

2,374,625

 

1,594,625

 

2,374,625

** No dilutive commonequivalent shares were outstanding because the average price of our commonstock, as quoted on the NASDAQ SmallCap Market, was below the exercise price ofall outstanding options and warrants in this period. 

 

9

 

**FORWARD INDUSTRIES,INC. AND SUBSIDIARIESNOTES TO FINANCIALSTATEMENTSMARCH 31, 2003(UNAUDITED) **

5.          INCOMETAXES

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

Three Months Ended

 

Six Months Ended

March 31,

 

March 31,

U.S. Federal and State:

2003

 

2002

 

2003

 

2002

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

$             -- 

 

$              --

 

$            --

 

$             --

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

--

 

--

 

--

 

--

 

 

 

 

 

 

 

Foreign:

 

 

 

 

 

 

 

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

(8,600)

 

2,500

 

19,200

 

19,400

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

--

 

--

 

(2,800)

 

--

Income  tax provision (benefit) 

$    (8,600)

 
    $       2,500
 

16,400

 

19,400

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 March 31, 2003,the subsidiary had cumulative undistributed earnings of approximately$142,000.  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. source income because ithas, 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.          COMMITMENTSAND CONTINGENCIES

**Royalty Commitments**

The Company has licensed the use of certaintrademarks of Motorola, Inc. ("Motorola") for products to be soldthroughout Europe, the Middle East and Africa (the "EMEA Region")effective January 1, 2001.  Under theterms of the license agreement, as amended, the Company is required to payMotorola a royalty based upon a percentage of the Company's net sales to thirdparties of licensed products within the EMEA Region. The license provides forminimum guaranteed royalty payments by the Company to Motorola over threecontract periods as follows:
-  $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 

10

 

**FORWARD INDUSTRIES,INC. AND SUBSIDIARIESNOTES TO FINANCIALSTATEMENTSMARCH 31, 2003(UNAUDITED) **

COMMITMENTS ANDCONTINGENCIES (CONTINUED)

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 $69,000 and $170,000 for the three-month periodsended March 31, 2003 and 2002, respectively, and $166,000 and $340,000 for thesix-month period ended March 31, 2003 and 2002, respectively, which is includedas a component of selling expense in the accompanying consolidated statementsof income.

**Legal Proceedings**

In October 2001, theCompany initiated action against Royal Industries, Inc. (Royal) in the Kings CountySupreme Court of New York, asserting causes of action for conversion and unjustenrichment.  The Company alleges that,without consent or authority of the Company, and with full knowledge of theCompany's rights under a security agreement, Royal wrongfully took possessionof certain assets in which the Company had a properly perfected securityinterest.  The Company seeks compensatorydamages of $1 million.  Royal has filed acounterclaim against the Company alleging abuse of process and harassment, andis seeking an award of punitive damages in the amount of $1 million.  Discovery is in the preliminary stage, butmanagement believes the counterclaim is without merit and intends to vigorouslydefend the Company against these allegations.

7.         ACCOUNTING FOR STOCK-BASEDCOMPENSATION

In December 2002, the FASB issued SFAS No. 148,Accounting for Stock-Based Compensation - Transition and Disclosure - anamendment of SFAS 123, which provides alternative methods for a voluntarychange to the fair value method of accounting for stock-based employeecompensation and amends the disclosure requirements of SFAS 123. The Companyhas elected to continue to account for its stock-based employee compensationplans under APB Opinion 25, Accounting for Stock Issued to Employees, andrelated interpretations. The following disclosures are provided in accordancewith SFAS 148.

The Company has a stockoption plan and accounts for that plan under the recognition and measurementprinciples of APB Opinion No. 25, Accounting for Stock Issued to Employees, andrelated Interpretations.  No stock-basedemployee compensation cost has been reflected in net income, as all optionsgranted under the plan had an exercise price equal to the quoted market valueof the underlying common stock on the date of grant.

11

 

**FORWARD INDUSTRIES,INC. AND SUBSIDIARIESNOTES TO FINANCIALSTATEMENTSMARCH 31, 2003(UNAUDITED) **

 

7.          ACCOUNTING FOR STOCK BASEDCOMPENSATION (CONTINUED)

If the Company had elected to recognize expense in the three and sixmonth periods ended March 31, 2003 and 2002, for the stock options grantedbased on the fair value at the date of grant consistent with the methodprescribed by SFAS No. 123, unaudited net income (loss) and income (loss) pershare would have been changed to the pro forma amounts indicated below:

Three Months Ended

 

Six Months Ended

March 31,

 

March 31,

 

2003

 

2002

 

2003

 

2002

Net  income, as reported.................. 

$  191,133

 

$  51,055

 

$  750,277

 

$  189,293

Less:  Stock-based employee    compensation costs    determined under fair value    based  method for all awards,    net of related tax effects............. 

30,384

 

72,981

 

60,768

 

154,454

Pro  forma net income (loss).......... 

$  160,752

 

$ (21,926)

 

$  689,509

 

$    34,839

 

 

 

 

 

 

 

Earnings  (loss) per share:

 

 

 

 

 

 

 

   Basic - as reported......................  

$       0.03

 

$        0.01

 

$       0.13

 

$        0.03

   Basic - pro forma.........................  

$       0.03

 

$        0.00

 

$       0.12

 

$        0.01

 

 

 

 

 

 

 

   Diluted - as reported................... 

$       0.03

 

$        0.01

 

$       0.13

 

$        0.03

   Diluted - pro forma......................  

$       0.03

 

$        0.00

 

$       0.12

 

$        0.01

The fair value of theabove stock-based compensation costs was determined using the Black-Scholesoption valuation model.  TheBlack-Scholes option valuation model was developed for use in estimating thefair value of traded options, which have no vesting restrictions, are fullytransferable and does not include a discount for large block trades.  In addition, option valuation models requirethe input of highly subjective assumptions including the expected stock pricevolatility, expected life of the option and other estimates.  Because the Company's employee stock optionshave characteristics significantly different from those of traded options, andbecause changes in the subjective input assumptions can materially affect thefair value estimate, in management's opinion, the existing models do not necessarilyprovide a reliable single measure of the fair value of its employee stockoptions.

 

12
 
**ITEM 2:   MANAGEMENT'S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

The followingdiscussion and analysis should be read in conjunction with the Company'sUnaudited Financial Statements and the notes thereto appearing elsewhere inthis Report.  This Report containsstatements that constitute forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995.  The Company cautions that forward-lookingstatements are not guarantees of future performance and involve risks anduncertainties, (including those identified in "Risk Factors" in the Company'sForm 10-KSB for the year ended September 30, 2002) and that actual results maydiffer materially from the estimates or forecasts set forth in the statementsthat constitute forward-looking statements as a result of various factors.

The following discussion and analysis compares our consolidatedresults of operations for the three months ended March 31, 2003, (the "2003Quarter") with the three months ended March 31, 2002 (the "2002 Quarter"), andthe six months ended March 31, 2003 (the "2003 Period") and the six monthsended March 31, 2002, (the"2002 Period") and is based on or derived from theUnaudited Consolidated Financial Statements included elsewhere in this Report.There have been no material changes in critical accounting estimates sinceSeptember 30, 2002.  All figures in thefollowing discussion are presented on a consolidated basis. 

**Resultsof Operations for the 2003 Quarter compared to the 2002 Quarter**

Our net income in the 2003 Quarter was$191,000 compared to net income of $51,000 in the 2002 Quarter, an increase ofapproximately $140,000.  Basic anddiluted earnings per share were $0.03 for the 2003 Quarter compared to $0.01per share in the 2002 Quarter.

**Sales**

Net sales increased by approximately $52,000 to approximately $3.90million in the 2003 Quarter compared to approximately $3.85 million in the 2002 Quarter.  The tables below set forth our sales byproduct line and geographic location of our customers for the 2003 and 2002Quarters.

**Sales for 2003 Quarter  3 Months ended March 31, 2003  (millions of dollars)**
** **

**US**

**Europe**

**Other**

**Total**

Cell  Phone Products

$0.64

$0.45

$0.08

$1.17

Diabetic Products

1.48

0.75

--

2.23

Other  Product Sales

0.48

--

0.03

0.50

**Total***

**$2.60**

**$1.20**

**$0.11**

**$3.90**
**  **            ** **            
**Sales for 2002 Quarter   3 Months ended March 31, 2002  (millions of dollars)**

** **

**US**

**Europe**

**Other**

**Total**

Cell Phone Products

$0.09

$1.36

0.26

$1.71

Diabetic Products

0.66

0.93

--

1.59

Other Product Sales

0.55

--

--

0.55

**Total***

**$1.30**
**$2.29****$0.26****$3.85**
* Tables may not total due to rounding.

13

 

**Cell Phone Product Sales:**

Our cell phone products include cases,carrying straps, faceplates and other decorative attachments used to carry orenhance the appearance of various cellular telephones.  We sell these products directly to cell phonemanufacturers such as Motorola and Nokia and also distribute our productsdirectly to wholesalers and retailers in the Europe, Middle East and Africa("EMEA") region under a license agreement with Motorola.

Sales of our cell phone products declined approximately $540,000 from$1.71 million in the 2002 Quarter to approximately $1.17 million in the 2003Quarter.  The primary reason for thedecline was that our largest European customer, Motorola Germany, decreasedorders by approximately $830,000.  Wehave historically supplied Motorola Germany with our carrying cases which theyincluded "in-box" with their phones for shipment to their distributors.  Motorola Germany did not order any of ourcases for in-box carry case programs in the 2003 Quarter. We continue to workclosely with Motorola Germany and believe they will resume their in-boxprograms with us as they launch additional phones, however, there can be noassurance that this will occur.  Thedecrease in sales to Motorola Germany was partially offset by an increase ofapproximately $545,000 in sales to other Motorola units in the U.S.  Overall sales of Motorola products in the2003 Quarter were approximately $1.09 million compared to $1.46 million in the2002 Quarter (including sales to third parties of Motorola branded productsunder our licensing agreement with Motorola of $400,000 and $430,000 in the2003 and 2002 Quarters, respectively).

**Diabetic Product Sales:**

We design and sell a line ofcarrying cases used by people with diabetes to carry their insulin and otherdiabetic monitoring equipment such as blood glucose monitors. We sell thesecases directly to manufactures of this equipment such as Abbott Labs, Bayer,Lifescan (a subsidiary of Johnson & Johnson), Therasense and Roche.  Sales of these cases increased approximately$640,000 to approximately $2.23 million in the 2003 Quarter compared to salesof approximately $1.59 million in the 2002 Quarter. The primary reason for theincrease is the addition of Bayer products that occurred in the fourth quarterof Fiscal 2002.

**Other Product Sales:**

We design and sell a numberof other carrying solutions such as camera bags, sporting goods and othercarrying solutions for an assortment of products on a made-to-order basis thatare customized to meet the individual needs of our customers.  By their nature, sales of our customizedproducts can vary from period to period without reflecting a significant trendin the overall demand for these items. Sales of these products remained relatively stable at approximately$500,000 in the 2003 Quarter compared to sales of approximately $550,000 in the2002 Quarter.

**Gross Profit**

  Our gross profit decreasedapproximately $101,000 to approximately $1.20 million in the 2003 Quarter from approximately$1.30 million in the 2002 Quarterdespite the slight increase in our sales. Our gross profit percentage fell to 31% in the 2003 Quarter from 34% inthe 2002 Quarter.  The product mix of oursales affects our gross profit margin, as we generally receive a lower marginon diabetic products than on cell phone products.  In addition, product mix within our cellphone product line affects our gross profit margin because sales under ourMotorola license agreement generally command a higher gross profit than largebulk sales to OEM customers. Additionally, freight expense in the 2002 Quarter was reduced byapproximately $77,000 due to import duties and United States customs refunds wereceived that served to reduce our cost of sales thereby contributing to ahigher gross profit percentage in Fiscal 2002. 

**Selling, General and Administrative Expense**

Selling expensesdecreased $123,000, or approximately 18%, to $577,000 in the 2003 Quarter, fromapproximately$701,000 inthe 2002 Quarter, due primarily to lower royalty expenses of approximately$100,000 paid to Motorola due tothe amendment, which as previously reported, became effective in August 2002,and approximately$33,000lower personnel expenses offset by slight increases in other sellingaccounts.  The ratio of selling expensesto net sales decreased to 15% in the 2003 Quarter, from approximately 18% inthe 2002 Quarter, as a result of the higher sales volume in the 2003 Quarterand lower expenses.

 

14

 

General and administrativeexpenses decreased approximately 3% or approximately $16,000, to approximately $499,000 in the 2003 Quarter, from approximately$515,000 in the 2002 Quarter.

Our overall operatingexpenses decreased approximately $139,000 or 11% to approximately $1.08 millionin the 2003 Quarter, from approximately $1.22 million in the 2002 Quarter.  Operating expenses declined as a percentageof sales to 28% in the 2003 Quarter compared to 32% in the 2002 Quarter as aresult.

**Income from Operations**

Pretax income fromoperations increased approximately $38,000 to $122,000 in the 2003 Quarter,compared to $84,000 in the 2002 Quarter, as a result of the decline inoperating expenses, partially offset by the reduction in gross profit asdescribed above.

**Other Income (Expense)**

Because we had noborrowings under our bank lines of credit at any time during the 2003 Quarter,our interest expense declined approximately $13,000 to approximately$1,000, compared to approximately$14,000 in the 2002 Quarter.  Other income (expense) increasedapproximately$80,000 toapproximately$60,000 ofincome in the 2003 Quarter compared to expense of approximately$20,000 in the 2002 Quarter.  The 2003 Quarter includes approximately$36,000 of realized and unrealizedforeign currency transaction gains and approximately$24,000 of income from a bad debtrecovery compared to the 2002 Quarter of approximately$12,000 of realized and unrealizedforeign currency transaction losses and the write down of an asset held forsale of approximately$25,000which was partially offset by a bad debt recovery of approximately $17,000.

**Income Taxes**

In the 2003 Quarter, ourprovision for income taxes decreased by approximately $11,000 to a benefit of approximately $9,000 compared to a provision of approximately$3,000 in the 2002 Quarter.  The decrease was a result of a quarterly lossgenerated 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.

The following discussion andanalysis compares our results of operations for the six months ended March 31,2003, and the six months ended March 31, 2002. 

**Resultsof Operations for the 2003 Period Compared to the 2002 Period**

Our net income in the 2003 Period was approximately $750,000 compared to net income of approximately$189,000 in the 2002 Period, anincrease of approximately $561,000. Basic and diluted earnings per share were $0.13 for the 2003 Periodcompared to $0.03 per share in the 2002 Period. 

**Sales**

Net sales increasedapproximately$1.37million or 17% to approximately$9.60 million in the 2003 Period compared toapproximately$8.23million in the 2002 Period.

 

15

 

The tables below set forthour sales by product line and geographic location for the 2003 and 2002Periods.

**Sales for 2003 Period  6 Months ended March 31, 2003  (millions of dollars)**

** **

**US**

**Europe**

**Other**

**Total**

Cell  Phone Products

$2.01

$1.87

0.25

$4.13

Diabetic Products

2.68

1.65

--

4.33

Other  Product Sales

1.00

--

0.15

1.15

**Total***

**$5.69**

**$3.52**

**$0.40**

**$9.60**

**Sales for 2002 Period   6 Months ended March 31, 2002  (millions of dollars)**

** **

**US**

**Europe**

**Other**

**Total**

Cell  Phone Products 

$0.35

$3.52

$0.27

$4.14

Diabetic Products 

1.67

1.53

--

3.20

Other  Product Sales

0.89

--

--

0.89

**Total***

**$2.91**

**$5.05**

**$0.27**

**$8.23**

* Tables may not total due to rounding.

**Cell Phone Product Sales:**

Sales of our cell phoneproducts remained stable at approximately $4.13 million in the 2003 Periodcompared to approximately $4.14 million in the 2002 Period.  As described above, in the second half of the2003 Period, sales to Motorola Germany, declined while sales to Motorolaentities in the Unites States increased. This can occur as the variousoperating activities within Motorola place orders for our products.  Despite the shift, overall sales of Motorolaproducts remained steady at approximately $3.8 million in the 2003 and 2002Periods (including sales to third parties of Motorola branded products underour licensing agreement with Motorola of approximately $1.05 million andapproximately $930,000 in the 2003 and 2002 Periods, respectively).

**Diabetic Product Sales:**

Due to strong demand for ourdiabetic equipment carrying cases, they have surpassed cell phone products asour leading revenue generator and now constitute approximately 45% of ouroverall sales.  Sales of these casesincreased approximately $1.13 million to approximately $4.33 million in the2003 Period compared to sales of approximately $3.20 million in the 2002Period. 

**Other Product Sales:**

Sales of these productsincreased by approximately $260,000 to approximately $1.15 million in the 2003Period compared to sales of approximately $890,000 in the 2002 Period.

**Gross Profit**

  Our gross profit on sales increased approximately $288,000 toapproximately $3.04 million in the 2003 Period from approximately $2.75 millionin the 2002 as a result of our higher sales volume.  Our gross profit percentage fell to 32% inthe 2003 Period from 33% in the 2002 Period as a result of the relativelyhigher contribution of product sales from our diabetic line of products. Additionally,as discussed above, freight expense in the 2002 Period was reduced byapproximately $77,000 due to import duties and United States customs refunds wereceived that served to reduce our freight expenses thereby contributing to ahigher gross profit percentage in the 2002 Period compared to the 2003 Period.

 

16

 

**Selling,General and Administrative Expense**

Selling expensesdecreased approximately $204,000, or approximately 14%, to approximately$1.25 million in the 2003 Period,from approximately$1.46million in the 2002 Period.  The decreaseis due primarily to lower royalty expenses of approximately$164,000 due to the amendment of ourlicense agreement with Motorola in August 2002, approximately$28,000 lower travel expenses due to lesstravel by our sales force and approximately$18,000 less rent expense due to the closure of ourCopenhagen office.  The ratio of sellingexpenses to net sales decreased to 13% in the 2003 Period, from approximately18% in the 2002 Period, as a result of the higher sales volume in the 2003Period and lower selling expenses.

General and administrativeexpenses increased approximately 8% or approximately $83,000, to approximately $1.12 million in the 2003 Period, from approximately$1.04 million in the 2002 Period.  The primary cause of the increase is theaccrual of certain personnel expenses based on the operating performance of thecompany partially offset by lower professional fees.

Our overall operating expenses decreased approximately $122,000 or 5%to approximately $2.37 million in the 2003 Period from approximately $2.49 inthe 2002 Period.  Operating expensesdeclined as a percentage of sales to 25% in the 2003 Period compared to 30% inthe 2002 Period as a result of higher sales volume and lower operating expenses.

**Income From Operations**

Pretax income from operations increased approximately$410,000 to approximately$668,000in the 2003 Period, compared to approximately$258,000 in the 2002 Period as a result of the increasedgross profit and the decrease in operating expenses, as described above.

**Other Income (Expense)**

Because we had no borrowings under our bank lines of creditat any time during the 2003 Period, our interest expense declined approximately$33,000 to approximately$3,000,compared to approximately$36,000in the 2002 Period.  Other income(expense) increased approximately$121,000to approximately$96,000 ofincome in the 2003 Period compared to expense of approximately$25,000 in the 2002 Period.  The 2003 Period includes approximately$72,000 of realized and unrealizedforeign currency transaction gains and approximately$24,000 of income from a bad debtrecovery compared to the 2002 Period of approximately$17,000 of realized and unrealizedforeign currency transaction losses and the write down of an asset held forsale of approximately$25,000which was partially offset by a bad debt recovery of approximately$17,000. 

**Income Taxes**

In the 2003 Period, our provisionfor income taxes decreased by approximately $3,000 to approximately $16,000compared to approximately $19,000in the 2002 Period.  The decrease was aresult of less income generated by our subsidiary in Switzerland.  We did not record a provision for our U.S.income taxes in either Period as we have sufficient net operating tax losscarryforwards available to offset our current U.S. taxable income for which wehave recorded a valuation allowance.  Wewill continue to monitor the likelihood of realization of the benefits of ourdeferred tax assets and may adjust the allowance in future periods as thebenefit of the asset becomes more certain.

**Liquidity and Capital Resources**

We generated approximately$472,000 of cash from operations in the 2003 Period, compared to approximately$123,000 in the 2002 Period.  The 2003Period's operating cash flows resulted primarily from net income ofapproximately $750,000, adjusted for non-cash items including deferred taxes ofapproximately $3,000, loss on sale of property, plant and equipment ofapproximately $7,000, and depreciation expense of approximately $66,000.  Improved cash collections helped us decreaseour accounts receivable by approximately $275,000 in the 2003 period.  The Company decreased its accounts payable by$380,000 in the 2003 Period and increased its inventory by approximately$392,000 in anticipation of sales. This is in contrast to increases ofapproximately $262,000 and approximately $498,000, in accounts payable andinventory, respectively, in the 2002 Period.

 

17

 

Investing activities usedapproximately $47,000 in the 2003 Period including approximately $50,000 topurchase additional computer equipment and software, which was offset byapproximately $3,000 proceeds from the sale of other equipment.  In the 2002 Period, investing activitiesprovided approximately $9,000 including the collection of approximately $11,000of officer's loans offset by approximately $2,000 of equipment purchases.

Financing activities usedapproximately $68,000 in the 2003 Period, including approximately $54,000 usedto purchase 45,200 shares of our common stock in the open market and to makeapproximately $14,000 of capital lease principal payments.  In the 2002 Period, financing activities usedapproximately $513,000 when we repaid $500,000 of our credit line and madeapproximately $13,000 in capital lease principal payments. 

At March 31,2003, our current ratio (current assets divided by current liabilities) was3.78 and our quick ratio (current assets less inventories divided by currentliabilities) was 3.00. Our working capital (current assets less currentliabilities) was approximately $4.0 million and our only long-term debtconsisted of approximately $44,000 owed on capital leases. 

Ourprimary sources of liquidity are our operating cash flow and our bank creditfacilities. The primary demands on our working capital are: our accountspayable arising in the ordinary course of business, the most significant ofwhich arise when our customers place orders and we order from our suppliers;and our commitments under our license agreement with Motorola. Historically,our sources of liquidity have been adequate to satisfy working capitalrequirements arising in the ordinary course of business. However, it ispossible that if one of our significant original equipment manufacturercustomers placed an unusually large order with us at a time when our creditfacility could not accommodate the increased demands on our working capital, wemight have to seek additional sources of liquidity. Although there can be noassurance, we believe that, under such circumstances, we could obtain anincrease in our credit facility or obtain necessary funds under an additionalfacility.

We renewed our credit facility with a bank effective September 30,2002 until September 30, 2003. The credit facility provides for a maximumuncommitted line of credit totaling $1.5 million, including a $1.0 millionsublimit for direct borrowings and bankers acceptances and a $500,000 sublimitfor letters of credit.  The credit lineis renewable at the discretion of the bank and is secured by a portion of ourassets. There are no financial ratios or other restrictive covenants associatedwith the credit facility. We are, however, required to have a consecutive30-day period during the term of the credit facility with zero borrowings, submitto periodic bank examinations and maintain performance acceptable to thebank.  Amounts borrowed under the creditfacility bear interest at the bank's prime rate in effect from time-to-timeplus one half of one percent. There are no fees payable in respect of undrawnbalances under the credit facility. This is an uncommitted line of credit andthere is no guarantee the bank will grant additional cash advances under theline of credit to us if required, or that our performance will remainsatisfactory to the bank, or that the bank will renew the credit facility.Although we believe that we could obtain alternate financing in the event of aloss of our current facility, there can be no assurance that such financingcould be obtained and the failure to do so could have a material adverse affecton our liquidity and financial condition. We completed the 30-day period withzero borrowings in October 2002. At March 31, 2003, we had no borrowings underthe credit facility and no commitments for letters of credit and the entirecredit line was available for our use.

In February 2003, we established, through a foreign subsidiary, aseparate credit facility with a bank that provides for a maximum uncommittedline of credit of $400,000.  Amountsborrowed under the facility may be structured as either term loans, with amaximum repayment period of 12 months, or as a guarantee facility, or anycombination of the foregoing.  The bankor the Company may terminate the facility at any time; however, suchtermination would not affect the stated maturity of term loansoutstanding.  Amounts borrowed as arevolving line of credit must be settled quarterly or converted into termloans.  An intercompany balance owed bythe subsidiary to the Company secures borrowings under the line and thesubsidiary has agreed to certain covenants. Amounts drawn under this credit facility bear interest at variable ratesestablished by the bank (5.1% as of March 31, 2003).  Additionally, we pay a credit commission of0.25% of the maximum amount of credit used during a quarter. At March 31, 2003there were no outstanding borrowings under this credit facility and we were incompliance with all terms of the agreement.

 

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On September 27, 2002, our Board of Directors authorized the repurchaseof up to 400,000 shares of our common stock, or approximately seven percent ofthe shares outstanding. In the 2003 Period we purchased 45,200 shares of commonstock for an aggregate purchase price of $54,300 in the open market.  We have not made any other repurchases underthat authorization.

Wehave licensed the use of certain trademarks of Motorola, which permits us tosell carrying cases bearing those marks throughout the EMEA Region. Under theterms of the license agreement, effective January 1, 2001, we are required topay Motorola a royalty based upon specified percentages of our net sales tothird parties of licensed products within the EMEA Region. The license, as ithas been amended, provides for minimum royalty payments by the Company toMotorola 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 October1, 2002 to September 30, 2003 
-  $408,000 for the contract period of October1, 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 dateof cancellation. Motorola has not guaranteed us a minimum amount of revenuesfrom the sale of the licensed products and we cannot guarantee that we willgenerate sufficient revenues to recoup the minimum royalty payments that we areobligated to pay to Motorola. The failure to generate such revenues could havea material adverse effect on our results of operations.  In the 2003 Period we generated approximately$1.05 million of sales to third parties under this license agreement for whichwe are obligated to pay Motorola a royalty in excess of the minimum quarterlyinstallment payable under the agreement.

TheCompany did not incur any long-term debt in the 2003 Period and at March 31,2003 we had no long-term debt other than capital lease obligations outstanding.

**ContractualObligations and Commercial Commitments**

The Company has enteredinto various contractual obligations and commercial commitments that, underaccounting principles generally accepted in the United States, are not recordedas a liability.   The following is asummary of such contractual cash obligations as of March 31, 2003:

**Contractual  Obligation or Commitment**

**Apr 03 - Mar 04**

**Apr 04- Mar 05**

**Apr 06 - Mar 07**

**Thereafter**

Employment & Consulting Agreements

$   645,000

$   173,000

$              0

$              0

Operating Leases

 179,000  

                 339,000 

28,000

0

License Agreements**

370,000

204,000

0

0

Totals

$1,194,000

$716,000

$   28,000

$              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.

 

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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**.  

Ourchief executive officer and chief financial officer have reviewed and evaluatedthe effectiveness of our disclosure controls and procedures (as defined inRules 13a-14 and 15d-14 under the Securities Exchange Act of 1934 (the"Exchange Act")), as of a date within ninety days before the filing of thisquarterly report. Based on that evaluation, the chief executive officer andchief financial officer have concluded that our current disclosure controls andprocedures are effective to ensure that information required to be disclosed byus in reports that we file or submit under the Exchange Act is recorded,processed, summarized, and reported within the time periods specified in theCommission's rules and forms.

**Changes in internal controls**.  

Therehave not been any significant changes in our internal controls or in otherfactors that could significantly affect these controls subsequent to the dateof their evaluation. There were no significant deficiencies or materialweakness in the internal controls, and therefore no corrective actions weretaken.

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**PART II.  OTHER INFORMATION**

ITEM 1.      LEGAL PROCEEDINGS

        None.

ITEM 2.      CHANGES IN SECURITIES

        None.

ITEM 3.      DEFAULTS UPON SENIOR SECURITIES

        None.

ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS

        None

ITEM 5.      OTHER INFORMATION

        None.

ITEM 6.        EXHIBITS AND REPORTS

(a) Exhibits filed herewith:

    99.1       Certification of the Chief Executive Officer under Section 906 of theSarbanes-Oxley Act of 2002

    99.2       Certification of the Chief Financial Officer under Section 906 of theSarbanes-Oxley Act of 2002

    99.3       Press release announcing the registrant's results of operations. 

(b) Reports on Form 8-K 

    For the three month period ended March 31, 2003 the Companyfiled the following current reports on Form 8-K:

    The Company's Current Reportfiled January 21, 2003 on Form 8-K, Item 9, announcing its results ofoperations for the quarter ended December 31, 2002.
 
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**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:  April 22, 2003 

                     
FORWARD INDUSTRIES, INC.(Registrant)  By:/s/  Jerome E. BallJerome E. BallChairman and Chief Executive Officer    By: /s/ Douglas W. SabraDouglas W. SabraVice President, Chief Financial OfficerandPrincipal Accounting Officer
 

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**CERTIFICATIONS**

I, Jerome E. Ball, certify that:

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

2.         Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

3.          Based on myknowledge, the financial statements, and other financial information includedin this quarterly 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'sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a‐14 and 15d‐14) for the registrant and we have:

a)    designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others 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'sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant's auditors and the audit committee ofregistrant's board of directors (or persons performing the equivalentfunctions):

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 or not material, that involves management or other employees who have asignificant role in the registrant's internal controls; and

6.        The registrant'sother certifying officers and I have indicated in this quarterly report whetheror not 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:April 22, 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 reviewedthis quarterly report on Form 10‐QSB of Forward Industries, Inc.;

2.          Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light 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'sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a‐14 and 15d‐14) for the registrant and we have:

a)    designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others 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'sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant's auditors and the audit committee ofregistrant's board of directors (or persons performing the equivalentfunctions):

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 or not material, that involves management or other employees who have asignificant role in the registrant's internal controls; and

6.         The registrant'sother certifying officers and I have indicated in this quarterly report whetheror not 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:April 22, 2003

/s/Douglas W. SabraDouglas W. SabraChief Financial Officer(Principal Financial and Accounting Officer)

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