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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File Number: 333-82327
WAREFORCE.COM, INC.
(Exact name of registrant as specified in its charter)
State or other jurisdiction of I.R.S. Employer I. D.
incorporation or organization: Nevada Number: 87-0542988
2361 Rosecrans Ave., Suite 155
El Segundo, California 90245
(Address of principal executive offices) (ZIP CODE)
Registrant's telephone number, including area code: (310) 725-5555
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: YES [X] NO [ ]
As of May 9, 2000 12,006,448 shares of Common Stock of the Registrant were
issued and outstanding.
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FORWARD-LOOKING STATEMENTS
Several of the matters discussed in this document contain forward-looking
statements that involve risks and uncertainties. Wareforce.com, Inc., a Nevada
corporation, and Subsidiaries (the "Company") wish to caution readers that
forward-looking statements are based on assumptions, which may or may not prove
accurate and accordingly are necessarily speculative. Readers should not place
undue reliance on any such forward-looking statements, which speak only as of
the date made. Actual results could vary materially from those anticipated for a
variety of reasons. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements which may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events. Readers are advised to review "Risks Related
to Our Financial Position" and "Risks Related to the Nature of Our Business" as
reflected in our most recent Form 10-K filed with the SEC on April 13, 2000.
WAREFORCE.COM, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION
Page
----
Item 1 Financial Statements
Consolidated Balance Sheets
March 31, 2000 (unaudited), and December 31, 1999 3
Consolidated Statements of Operations
Three Month Periods Ended March 31, 2000 (unaudited)
and 1999 (unaudited) 4
Consolidated Statements of Cash Flows
Three Month Periods Ended March 31, 2000 (unaudited)
and 1999 (unaudited) 5
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Conditions and Results of Operations 12
PART II Other Information 16
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WAREFORCE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and equivalents $ 3,983,377 $ 367,726
Trade receivables, net of allowance of $375,145 at March 31,
2000, and $356,930 at December 31, 1999 24,064,840 24,518,262
Investment in sales-type leases-current 1,025,328 865,142
Other receivables 2,126,505 1,331,944
Inventories 2,110,659 3,786,818
Prepaid expenses 517,540 559,227
Income taxes receivable 149,311 220,166
Deferred tax assets 631,000 631,000
------------ ------------
Total current assets 34,608,560 32,280,285
Property and equipment, net 1,825,159 2,236,125
Investment in uMember 1,059,318 --
Investment in sales-type leases 1,652,880 1,556,054
Other assets 93,670 72,058
Goodwill, net of amortization of $915,992 and $783,820
at March 31, 2000 and December 31, 1999 3,817,082 4,147,386
------------ ------------
Total assets $ 43,056,669 $ 40,291,908
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 13,898,333 $ 18,591,340
Current portion of long - term debt 1,007,575 1,117,819
Accounts payable 17,883,632 17,016,287
Due to uMember 1,611,430 --
Accrued expenses 888,158 812,703
Sales taxes payable 540,492 554,903
Customer deposits 616,667 704,542
------------ ------------
Total current liabilities 36,446,287 38,797,594
Long - term debt, less current portion 1,684,891 1,437,111
------------ ------------
Total liabilities 38,131,178 40,234,705
------------ ------------
Commitments
Minority Interest -- (251,999)
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000 shares
authorized, none issued or outstanding -- --
Common stock, $.001 par value, 50,000,000 authorized,
11,997,598 and 10,831,948 shares issued and outstanding
as of March 31, 2000 and December 31, 1999, respectively 11,998 10,832
Additional paid-in capital 17,258,795 13,105,544
Deferred compensation (230,433) --
Notes receivable and advances to stockholder (3,399,499) (3,399,999)
Accumulated Deficit (8,715,370) (9,407,175)
------------ ------------
Total stockholders' equity 4,925,491 309,202
------------ ------------
Total liabilities and stockholders' equity $ 43,056,669 $ 40,291,908
============ ============
The accompanying notes are an integral part of these financial statements.
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WAREFORCE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------------
2000 1999
------------ ------------
Net Sales $ 37,289,591 $ 28,213,967
Cost of Goods Sold 33,420,956 25,265,968
------------ ------------
Gross Profit 3,868,635 2,947,999
Selling, General & Administrative Expenses 4,601,274 3,346,144
------------ ------------
(Loss) from Operations (732,639) (398,145)
Interest Expense (307,016) (144,709)
Interest Income 54,106 2,425
Other Income (Expense) (34,602) (37,905)
Equity in net loss of uMember (438,019) --
Gain on shares sold in uMember 2,149,975 --
------------ ------------
Income (Loss) Before Taxes 691,805 (578,334)
Provision (Benefit) for Income Taxes -- --
------------ ------------
Net Income (Loss) $ 691,805 ($578,334)
============ ============
Basic and Diluted Earnings (Loss) Per Common Share $ 0.06 ($0.05)
============ ============
Shares used to compute basic
earnings (loss) per share 11,314,000 10,550,000
============ ============
Shares used to compute diluted
earnings (loss) per share 12,232,000 10,550,000
============ ============
The accompanying notes are an integral part of these fianancial statements.
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WAREFORCE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
--------------------------------
2000 1999
----------- -----------
OPERATING ACTIVITIES:
Net income (loss) $ 691,805 ($578,334)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 369,288 199,156
Realized gain on investment (2,149,975) --
Provision for bad debts 45,000 24,999
Equity in net loss of uMember 438,019 --
Changes in operating assets and liabilities:
Accounts receivable 408,423 2,796,447
Investment in sales-type leases (257,012) --
Other receivables (814,094) (150,592)
Related party receivable 1,204,336 --
Inventories 1,676,159 261,843
Prepaid expenses (292) 2,983
Income tax receivable 70,855 --
Other assets (21,612) 14,354
Accounts payable 983,937 (1,799,261)
Due to uMember 1,611,430 --
Accrued expenses (26,831) (1,159,714)
----------- -----------
Net cash provided by (used in) operating activities 4,229,436 (388,119)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (197,032) (360,669)
Proceeds from shares sold in uMember 2,306,743 1,210
Cash used in acquisition -- (750,000)
----------- -----------
Net cash provided by (used in) investing activities 2,109,711 (1,109,459)
----------- -----------
Cash flows from financing activities:
Net repayments on line of credit (4,693,007) (798,500)
Long term debt repayments (110,244) (2,299)
Long term debt borrowings 247,780 --
Notes receivable and advances to stockholders 500 (7,836)
Proceeds from issuance of common stock -- 2,197,500
Proceeds from exercise of warrants 1,831,475 --
----------- -----------
Net cash (used in) provided by financing activities (2,723,496) 1,388,865
----------- -----------
Net increase (decrease) in cash and cash equivalents 3,615,651 (108,713)
Cash acquired in acquisitions -- 80,404
Cash and cash equivalents, beginning of period 367,726 817,721
----------- -----------
Cash and cash equivalents, end of period $ 3,983,377 $ 789,412
=========== ===========
The accompanying notes are an integral part of these financial statements.
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WAREFORCE.COM, INC.AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes -- --
========== ========
Interest $ 307,016 $144,708
========== ========
Non-cash Financing Activities
Equity increase in unconsolidated subsidiary $2,069,605 --
========== ========
Value of warrants issued to non-employee
to be amortized over service period $ 253,337 --
========== ========
The accompanying notes are an integral part of these financial statements.
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WAREFORCE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND GENERAL INFORMATION
In our management's opinion, the unaudited consolidated balance sheet
of Wareforce.com at March 31, 2000, and the unaudited statements of operations
and unaudited consolidated statements of cash flows for the three month periods
ended March 2000 and 1999 include all adjustments (consisting only of normal
recurring adjustments) necessary to fairly present these financial statements.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The year-end balance sheet data was
derived from audited financial statements, but does not include disclosures
required by generally accepted accounting principles. Operating results for the
three months ended March 31, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000. You should read
these statements in conjunction with our most recent Form 10K filed with the SEC
on April 13, 2000.
The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make certain estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Significant estimates in these financial statements include allowances
for uncollectible accounts receivable, unreimbursed product returns and net
realizable value of rebates. Actual results could differ from those estimates.
Significant Risk
During 1999 and the first quarter of 2000, the Company continued the
expansion of its sales and technical services infrastructure through both
internal growth and acquisition. As a result, the Company had a working capital
deficit of $6.5 million and incurred a $2.5 million loss at December 31, 1999.
For the three months ended March 31, 2000 the Company also incurred a net loss
of $1.5 million before a one time gain of $2.1 million, related to the sales of
a portion of its investment in uMember. Working capital remained at a deficit of
$1.8 million versus $6.5 million at December 31, 1999. The Company's business
plan assumes continued operating losses in the first half of 2000 and additional
acquisitions to further its penetration into the technical services and
e-commerce marketplace. Management is implementing actions in conjunction with
its business plan that focus on actions to increase margins, reduce costs, and
improve liquidity. These actions include negotiations with suppliers to achieve
more favorable costs and terms, evaluation of account profitability, and
increasing focus on working capital management.
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In November 1999, the Company received a commitment of up to $20
million in debt financing to fund its acquisition strategy. The acquisitions
must meet certain criteria to be approved for the funding. The Company also
plans to raise additional working capital through private offerings of equity.
Management believes that funds on hand, available through its line of credit and
its ability to raise private equity subsequent to year-end, will be sufficient
to fund its needs through December 31, 2000. During the first quarter of 2000,
approximately 1,100,000 Series A warrants and 83,000 Series B warrants were
exercised, raising approximately $1.8 million. In addition, the sale of
1,085,000 shares of Wareforce holdings in uMember common stock have resulted in
proceeds of $2.3 million, net of selling costs, to Wareforce. However, there can
be no assurance that the Company will obtain sufficient additional funds to
execute its business plan or generate positive operating results. The Company's
current line of credit will terminate in August 2000. Management believes that
the line of credit will be renewed or that other facilities will be available,
however, there can be no assurance that it will be renewed or that other
facilities will be available.
In March 1999 certain assets and liabilities of Kennsco were acquired
for $750,000 in cash and a note for $250,000, payable in our common stock. The
note was converted into 51,948 shares of our common stock based on its closing
price on May 19, 1999 of $4.8125 per share as quoted on the NASD Electronic
Bulletin Board. The transaction was accounted for under the purchase method of
accounting.
The following unaudited pro forma consolidated results of operation
have been prepared as if the acquisition of Kennsco had occurred as of the
beginning of fiscal 1999.
Three Months
Ended
March 31, 1999
--------------
Net Sales $32,394,901
Net Loss $ (482,549)
Net Loss Per Basic Common Share $ (0.05)
Assumptions relating to budgeting, marketing and other management
decisions are subjective in many respects. They are therefore susceptible to
interpretations and periodic revisions. These interpretations and revisions may
be based on actual experience and business developments and their impact may
cause us to alter our marketing, capital expenditure or other budgets. This may
in turn affect our business, financial position, and results of operations and
cash flows. Therefore, you should not place undue reliance on forward-looking
statements contained in this Form 10-Q. You should also consider the other risks
more fully detailed in our Form 10-K filing with the SEC on April 13, 2000.
NOTE 2 - uMEMBER
In April 1999 we exchanged 30,000 shares of our common stock for a
70% interest in uMember, a start up entity. The transaction was valued at $5.75
per Wareforce share, the fair market value on the date that the shares were
issued as determined by the closing price of our common stock as quoted on the
NASD Electronic Bulletin Board. As there were no assets or liabilities on the
date of our investment, the entire purchase price was allocated to goodwill.
In February and March 2000, uMember sold 2,000,000 shares of common
stock, in a private placement, at an issue price of $2.50 per share for net
proceeds of approximately, $3.8 million.
This transaction was part of an agreement entered into in January
2000 with Art Cards, Inc. (AC), a Colorado corporation in which AC acquired all
of the outstanding common stock of uMember in exchange for 15,000,000 restricted
shares of AC. The transaction will be accounted
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for as a reverse merger acquisition, which results in a recapitalization of
uMember in as much as it is deemed to be the acquiring entity for accounting
purposes. The Company's ownership in uMember will be diluted from the post
reverse merger and private placement from 70% as of December 31, 1999 to 39%.
The recording of these transactions resulted in an increase of $2,069,000 in the
Company's investment in uMember, which has been recorded in equity under Staff
Accounting Bulletin 51 (SAB 51), "Accounting for Sales of Stock by a
Subsidiary." SAB 51 requires that the difference between the carrying amount of
the parent's investment in the subsidiary and the underlying net book value of
the subsidiary after the stock issuance transaction by the subsidiary be
reflected as a gain or loss in the consolidated financial statements or
reflected as a capital transaction. As a result of this reduction in ownership
percentage, uMember is being unconsolidated as of March 16, 2000 and will be
accounted for under the equity method of accounting.
At December 31, 1999, amounts due to Wareforce from uMember amounted
to approximately $1.2 million. At March 31, 2000, amounts due to uMember
amounted to approximately $1.6 million from Wareforce. This balance represents
the remaining proceeds of the private placement and is due on demand.
NOTE 3 - uMEMBER STATEMENTS OF OPERATIONS
As uMember is now an unconsolidated subsidiary, the following
unaudited Statements of Operations represent their financial position as a
stand-alone company for the periods indicated.
UMEMBER
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
---------------------------------
2000 1999
------------ -----------
Net Sales $ 14,816 --
Cost of Goods Sold 14,745 --
------------ -----------
Gross Profit 71 --
Selling, General & Administrative Expenses 745,133 19,064
------------ -----------
(Loss) from Operations (745,062) (19,064)
Interest Expense (21,633) (167)
------------ -----------
Income (Loss) Before Taxes (766,695) (19,231)
Provision (Benefit) for Income Taxes -- --
------------ -----------
Net Loss ($766,695) ($19,231)
============ ===========
Net Loss Per Common Share of Common Stock ($0.06) $ 0.00
============ ===========
Average Common Shares Outstanding 13,892,424 5,000,000
============ ===========
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NOTE 4 - EARNINGS PER SHARE
During a loss period the assumed exercise of in the money stock
options and warrants has an anti-dilutive effect. There were approximately
2,000,000 and 1,416,000 options and warrants whose exercise price was less than
the market price at March 31, 2000 and 1999 respectively. There were 1,110,000
warrants whose exercise price equaled the market price at March 31, 1999.
Additionally, there were approximately 22,000 and 10,000 options whose exercise
price exceeded the market price at March 31, 2000 and 1999 respectively. The
potential dilutive effect of these options and warrants was 303,000 at March 31,
1999.
Net Income (Loss) Per Common Share (in thousands, except per share amounts)
Net income (loss) per common share is calculated as follows: (Unaudited)
Three Months Ended March 31,
------------------------------------------------------------------
2000 1999
------------------------------ -------------------------------
Net Per-Share Net Per-Share
Income Shares Amount Loss Shares Amount
Basic earnings per share
Net income available
to common shareholders $692 11,314 $0.06 ($578) 10,550 ($0.05)
===== ======
Effect of Dilutive Securities
Common stock options -- 918 -- --
---- ------ ----- ------
Diluted earnings per share
Net income (loss) to available to
common stockholders and
assumed conversions $692 12,232 $0.06 ($578) 10,550 ($0.05)
==== ====== ===== ===== ====== ======
NOTE 5 - SEGMENT REPORTING
The Company has adopted the disclosure requirements of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" which
establishes standards for additional disclosure about operating segments for
interim and annual financial statements. This standard requires financial and
descriptive information be disclosed for segments whose operating results are
reviewed by the chief operating officer for decisions on resource allocation. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers.
The Company operates predominately in a single industry segment as a
reseller of computer-based technology products and services. Based on geographic
location, the Company has three principal segments. These segments are 1) West
Coast, 2) Midwest, and 3) East Coast. The chief operating decision maker manages
and reviews the results of these regions at the revenue, gross margin and income
(loss) from operations level. The total assets at each region are insignificant
and therefore,
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are not allocated. The accounting policies of the segments are the same as those
described in Note 1.
Financial information by geographic segments is as follows (in thousands):
For the three months ended March 31, 2000 (unaudited)
Corporate
West Coast Mid-West East Coast Expenses Consolidated
-----------------------------------------------------------------------------
Revenue $32,512 $ 3,836 $942 $ 0 $ 37,290
Gross Profit $ 2,858 $ 897 $113 $ 0 $ 3,868
Expenses $ 1,596 $ 1,026 $ 51 $ 1,928 $ 4,601
Income(Loss) from Operations $ 1,262 ($129) $ 62 ($1,928) ($733)
For the three months ended March 31, 1999
Corporate
West Coast Mid-West East Coast Expenses Consolidated
-----------------------------------------------------------------------------
Revenue $27,348 $ 0 $866 $ 0 $ 28,214
Gross Profit $ 2,845 $ 0 $103 $ 0 $ 2,948
Expenses $ 1,632 $ 0 $ 73 $ 1,641 $ 3,346
Income(Loss) from Operations $ 1,213 $ 0 $ 30 ($1,641) ($398)
NOTE 6 - CANCELLATION OF WARRANTS
Upon mutual agreement between management of the Company and Phoenix
Alliance, the agreement to issue 400,000 warrants at $6.0625 in March 2000 were
cancelled.
NOTE 7 - NON-EMPLOYEE WARRANTS
In March 2000 the Company issued 125,000 warrants exercisable at
$4.00 for investment services. The warrants were valued using the Black Scholes
option pricing model with the following weighted average assumptions: 0 dividend
yield, expected volatility of 81.23%, weighted average risk-free interest rate
of 6.3% and expected life of three years. The value of these warrants for
non-cash compensation was determined to be approximately $253,000 and was
recorded in stockholders' equity in the accompanying consolidated financial
statements. The compensation will be charged to the statement of operations
over the life of the contract to provide services.
NOTE 8 - CONVERTIBLE PREFERRED SHARES
On May 2, 2000 Wareforce finalized a $3.5 million convertible
preferred share private placement. Wareforce will issue 454,545 preferred shares
with a 6% coupon payable semi-annually. The preferred shares are convertible to
Common shares based on a series of formulas at the lessor of 150% of the common
stock average bid price on the closing date or 95% to 107% of the bid price at
the time of conversion
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depending on the time held. The preferred shares are to be registered within 120
days of the closing date. The preferred shares are not convertible for a period
of nine months if the closing bid price is below $4.25. The preferred shares
must be converted to common shares at the end of three years. Also included are
166,667 five year warrants convertible at 125% of the bid price on the closing
date.
ITEM 2
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
The forward-looking statements included in Management's Discussion
and Analysis of Financial Conditions and Results of Operations, which reflect
management's best judgment based on factors currently known, involve risks and
uncertainties. Actual results could differ materially from those anticipated in
these forward-looking statements as a result of a number of factors, including
but not limited to those discussed below. Forward-looking information provided
by Wareforce pursuant to the safe harbor established by recent securities
legislation should be evaluated in the context of these factors.
The following table sets forth certain financial data as a percentage
of sales for the periods indicated:
Three Months Ended March 31,
----------------------------
2000 1999
------ ------
Net Sales 100.0% 100.0%
Cost of Goods Sold 89.6% 89.6%
------ ------
Gross Profit 10.4% 10.4%
Selling, General & Administrative Expenses 12.4% 11.8%
------ ------
(Loss) from Operations -2.0% -1.4%
Interest Expense -0.8% -0.5%
Interest Income 0.1% 0.0%
Other Income (Expense) -0.1% -0.1%
Loss of uMember on equity basis -1.2% --
Gain on shares sold in uMember 5.8% --
------ ------
Income (Loss) Before Taxes 1.9% -2.0%
Provision (Benefit) for Income Taxes -- --
------ ------
Net Income (Loss) 1.9% -2.0%
====== ======
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NET SALES. During the first quarter of 2000 net sales were $37.3
million compared to $28.2 million for the comparable period in 1999. This is an
increase of $9.1 million or 32.2%. This was attributable to the growth in
current business of Wareforce of approximately $5.3 million. In addition,
Kennsco added $3.8 million in the quarter ended March 31, 2000, while no
revenues were recorded in the comparable period in 1999. The increase in
revenues of $9.1 million was achieved by increases in hardware, software
licensing sales, and technical services. Of the $9.1 million increase, technical
services contributed $2.6 million or 28%.
GROSS PROFIT. As a percentage of net sales our gross margin during
the first quarter of 2000 was 10.37% compared to 10.45% for the same period in
1999. In the first quarter of 2000 Wareforce contributed 8.88% while Kennsco
contributed 23.37% for a blended margin of 10.37%. In the comparable period in
1999 Wareforce contributed the entire margin of 10.45%. The decrease in the
margin of 1.49% for Wareforce was the result of Apple changing their business
model and no longer using outside contractors to augment their sales force
contributing 0.91% of the change, while the remaining decrease is due to
software licensing, which had lower margins in 2000 than in 1999.
SELLING, GENERAL, & ADMINISTRATIVE EXPENSES (SG&A). On a consolidated
basis SG&A increased from 11.8% to 12.4%, as a percentage of sales, from the
first quarter of 1999 to the comparable period in 2000. SG&A for Wareforce, as a
percentage of sales, decreased from 11.9% to 10.7% from the first quarter of
1999 to the comparable period in 2000. However, the acquisition of Kennsco with
an SG&A of 26.8% increased the overall percentage to 12.4%. In absolute terms,
during the first quarter of 2000, selling, general, and administrative expenses
were $4.6 million compared to $3.3 million for the comparable period in 1999, an
increase of $1.3 million. Most of this increase came from Kennsco, which added
$1.0 million, with Wareforce adding the balance. Kennsco was not included in the
first quarter of 1999 while they are included in the comparable period in 2000.
INTEREST EXPENSE. Interest expense increased to $307,000 from $145,000 in the
three months ended March 31, 2000 over the comparable period in 1999. Kennsco,
not included in the first quarter of 1999, added $30,000 of the increase of
$162,000 with the balance being added by Wareforce. The increase was caused by
the growth in revenue and the need to finance accounts receivable, and a 1%
increase in the interest rate.
OTHER INCOME. Other income increased to $1.7 million in the first quarter of
2000 from an expense of $38,000 in the comparable quarter of 1999. This was
primarily the result of a one-time sale of 1,085,000 shares of uMember common
stock held by Wareforce. The proceeds of the sale approximated $2.1 million, net
of selling costs. The Company also recorded a $0.4 million loss for its equity
in the net loss of uMember for the quarter ended March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
From inception through 1997, operations have been financed primarily
through credit from vendors and manufacturers as well as from traditional
revolving credit lines that are maintained with various
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financing companies. Currently, we have a $30.0 million line of credit that was
obtained on August 27, 1998 and expires August 27, 2000, if not renewed.
The actual level of borrowing capacity under our line of credit is
based on the quantity and quality of our inventory and accounts receivable.
Advances under the terms of credit line agreement are limited to the sum of 85%
of eligible accounts receivable plus 75% of eligible inventory. Interest is
payable at the finance company's prime rate (8.75% at March 31, 2000) and may be
raised to the prime rate plus two percent under certain conditions.
Our borrowings are also subject to certain covenants. Pursuant to the
line of credit, we are required to maintain financial covenants related to our
loans to our officers and a minimum net worth of $3.5 million. These covenants
were amended in March 1999, effective December 31, 1998, and again in December
1999, effective August 31,1999. An additional amendment in March 1999 provided
for a $2 million revolving sub-facility for Kennsco under the same terms as the
original loan agreement. As of March 31, 2000, we were in compliance with the
amended covenants.
The credit facility is secured by substantially all of our assets and
is personally guaranteed by a majority stockholder of the Company in the amount
of $1.5 million. Total outstanding borrowings under the line of credit were
$13.9 million as of March 31, 2000.
The line of credit also includes inventory financing through Nations
Credit Distribution Finance, Inc. Advances under this flooring plan are based
upon qualified inventory purchases and bear no interest for 30 days. Interest is
charged at a rate of 1.5% per month for payments we make beyond the initial
30-day period. Typically, we settle our inventory flooring plan payments within
the 30-day period.
Working capital improved during the quarter from ($6.5) million at
December 31, 1999 to ($1.8) million at March 31, 2000. The Company generated
$4.2 million in cash from operations during the quarter ended March 31, 2000
compared to ($0.4) million deficit in cash from operations during the quarter
ended March 31, 1999.
The Company's investing activities during the quarter ended March 31,
2000 generated cash of $2.1 million. Sale of 1,085,000 shares of uMember held by
Wareforce generated $2.3 million net of selling costs, and was offset by
purchases of property and equipment. In the comparable quarter of 1999, $750,000
cash was used in the acquisition of Kennsco, and $360,000 was used to acquire
property and equipment.
Net cash used in financing activities in the quarter ended March 31,
2000 was $2.7 million. Repayments on the line of credit were $4.7 million offset
by the exercise of warrants of $1.8 million and an increase in long term debt of
$0.1 million. Net cash provided by financing activities for the quarter ended
March 31, 1999 was $1.4 million. The primary source of this financing activity
was our $2.2 million equity placement, offset by $0.8 million in repayments
against the line of credit.
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Many factors relating to obtaining financing are beyond our control. Any
decrease or material limitation on the amount of borrowings available to us
under our line of credit or other financing arrangement, such as floor plan
financing provided by manufacturers and vendors, will adversely affect our
ability to fill sales orders and/or increase our sales. It will also adversely
affect our financial position and operating results. We cannot guarantee that
our creditors will continue to extend credit to us in the amounts they currently
do.
We anticipate that we will need additional equity investments in the
future to continue our acquisition strategy as well as to fund general working
capital. There can be no assurance that such investments will be obtained. If
they are not, we will be materially, negatively affected.
YEAR 2000 COMPLIANCE
We suffered no material interruptions to our business due to Year
2000 compliance issues, nor have any of our vendors or customers indicated to us
that they were materially affected.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates
primarily as a result of its borrowings under its line of credit. The Company's
line of credit bears interest at the prime rate publicly announced by First
Union National Bank and can be raised to prime plus two percent. Assuming an
increase of one-half a percentage point on January 1, 2000 and no change in the
outstanding borrowings under the lines of credit at December 31, 1999, interest
expense would increase by approximately $93,000 for fiscal year 2000 as compared
to 1999.
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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 of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports of Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WAREFORCE.COM, INC.
REGISTRANT
Date: May 11, 2000 By: /s/ DON HUGHES
--------------------------------------
Don Hughes, Chief Financial Officer
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