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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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
2281 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 July 11, 2000 12,135,615 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
June 30, 2000 (unaudited) and December 31, 1999 3
Consolidated Statements of Operations
Three and Six Month Periods Ended June 30, 2000,
(unaudited) and June 30, 1999 (unaudited) 4
Consolidated Statements of Cash Flows
Six Month Periods Ended June 30, 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 13
PART II OTHER INFORMATION 18
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WAREFORCE.COM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2000 December 31, 1999
------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash $ 2,804,284 $ 367,726
Trade receivables, net of allowance of $495,793 and $356,930
at June 30, 2000, and December 31, 1999, respectively 34,807,402 24,518,262
Investment in sales-type leases-current 1,076,778 865,142
Other receivables 2,642,527 1,331,944
Inventories 3,575,168 3,786,818
Prepaid expenses 515,209 559,227
Income taxes receivable 89,416 220,166
Deferred tax assets 631,000 631,000
------------ ------------
Total current assets 46,141,784 32,280,285
Property and equipment, net 3,430,368 2,236,125
Investment in uMember 548,467 --
Investment in sales-type leases, net of current 1,581,782 1,556,054
Other assets 231,131 72,058
Goodwill, net of amortization of $1,123,475 and $783,820
at June 30, 2000 and December 31, 1999, respectively 3,956,450 4,147,386
------------ ------------
Total assets $ 55,889,982 $ 40,291,908
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 24,206,396 $ 18,591,340
Current portion of long - term debt 1,072,878 1,117,819
Accounts payable 19,035,918 17,016,287
Accrued expenses 1,232,065 812,703
Sales taxes payable 571,688 554,903
Customer deposits 406,294 704,542
------------ ------------
Total current liabilities 46,525,239 38,797,594
Long - term debt, less current portion 1,631,319 1,437,111
------------ ------------
Total liabilities 48,156,558 40,234,705
------------ ------------
Commitments
Minority interest -- (251,999)
Redeemable convertible series A preferred stock 2,864,715 --
Preferred stock, $.001 par value, 5,000,000 shares
authorized, 454,545 shares issued and outstanding
as of June 30, 2000. None at December 31, 1999
Stockholders' equity:
Common stock, $.001 par value, 50,000,000 authorized,
12,135,615 and 10,831,948 shares issued and
outstanding as of June 30, 2000 and December
31, 1999, respectively 12,089 10,832
Additional paid-in capital 18,258,782 13,105,544
Stock subscription 175,000 --
Deferred compensation (279,933) --
Notes receivable and advances to stockholder (3,399,499) (3,399,999)
Accumulated Deficit (9,897,730) (9,407,175)
------------ ------------
Total stockholders' equity 4,868,709 309,202
------------ ------------
Total liabilities and stockholders' equity $ 55,889,982 $ 40,291,908
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
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WAREFORCE.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
------------------------------- -------------------------------
6/30/00 6/30/99 6/30/00 6/30/99
------------ ------------ ------------ ------------
Net Sales $ 45,579,549 $ 42,583,165 $ 82,869,140 $ 70,797,132
Cost of Sales 39,677,732 37,318,432 73,098,688 62,584,400
------------ ------------ ------------ ------------
Gross Profit 5,901,817 5,264,733 9,770,452 8,212,732
Selling, General & Administrative 5,618,441 4,951,921 10,219,715 8,298,064
------------ ------------ ------------ ------------
Operating (Loss) Income 283,376 312,812 (449,263) (85,332)
Interest Expense (259,138) (175,836) (566,154) (320,545)
Interest Income 34,521 2,136 88,628 4,561
Other Income (Expense) (32,868) (23,895) 2,082,505 (61,800)
Equity Loss in uMember (510,851) -- (948,870) --
------------ ------------ ------------ ------------
Income (Loss) Before Taxes (484,960) 115,217 206,846 (463,116)
Provision (Benefit) for Taxes -- -- -- --
------------ ------------ ------------ ------------
Net Income (Loss) $ (484,960) $ 115,217 $ 206,846 $ (463,116)
============ ============ ============ ============
Basic and Diluted Earnings (Loss)
Per Common Share $ (0.01) $ 0.01 $ 0.02 $ (0.04)
Shares used to compute basic
earnings (loss) per share 12,032,000 10,831,948 11,552,000 10,669,000
Shares used to compute diluted
earnings (loss) per share 12,148,000 10,831,948 11,668,000 10,674,000
The accompanying notes are an integral part of these consolidated
financial statements.
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WAREFORCE.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended
June 30,
-------------------------------
2000 1999
------------ ------------
(Unaudited)
Operating Activities
Net income (loss) $ 206,846 $ (463,116)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization 648,464 541,670
Amortization of deferred compensation 63,000 --
Realized gain on investment (2,149,975) --
Provision for bad debts 90,000 63,999
Deferred taxes -- 1,519
Equity in net loss of uMember 948,870 --
Minority interest -- (37,447)
Changes in operating assets and liabilities:
Accounts receivable (10,237,562) (5,743,166)
Net investment in sales-type leases (237,364) (78,364)
Other receivables (125,480) (695,055)
Inventory 211,650 (1,361,837)
Prepaid expenses 24,535 (16,315)
Income tax receivable 130,750 2,680
Other assets (159,073) 45,357
Accounts payable 2,028,778 (761,895)
Accrued expenses (498,655) (938,378)
------------ ------------
Net cash used in operating activities (9,055,216) (9,440,348)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (518,613) (598,516)
Proceeds from shares sold in uMember 2,306,743 --
Cash used in acquisitions (1,310,000) (750,000)
------------ ------------
Net cash provided by (used in) investing activities 478,130 (1,348,516)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on line of credit 5,615,056 8,304,301
Long term debt repayments (44,941) (289,592)
Long term debt borrowings 194,208 117,286
Notes receivable and advances to shareholders 500 (17,710)
Proceeds from issuance of common stock -- 2,197,500
Proceeds from issuance of Series A preferred stock 3,359,623 --
Proceeds from exercise of warrants 1,855,827 --
------------ ------------
Net cash provided by financing activities 10,980,273 10,311,785
------------ ------------
NET INCREASE (DECREASE) IN CASH 2,403,187 (477,079)
CASH ACQUIRED IN ACQUISITION 33,371 80,404
CASH, beginning of period 367,726 817,721
------------ ------------
CASH, end of period $ 2,804,284 $ 421,046
============ ============
The accompanying notes are an integral part of these financial statements.
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WAREFORCE.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes -- --
========== ========
Interest $ 566,154 $320,545
========== ========
NON-CASH FINANCING & INVESTING ACTIVITIES
Conversion of debt into common stock -- $250,000
========== ========
Stock issued to acquire majority interest -- $172,500
========== ========
Equity increase in unconsolidated subsidiary $2,069,605 --
========== ========
Value of warrants issued to non-employee to be
amortized over service period $ 253,337 --
========== ========
Value of stock issued to non-employee to be
amortized over service period $ 142,500 --
========== ========
Beneficial conversion feature of redeemable
preferred stock amortized over nine months $ 310,520 --
========== ========
Acquisition of Westech
Fair value of assets acquired not including goodwill $ 219,629 --
Less: liabilities assumed 542,983 --
---------- --------
Goodwill $ 323,354 --
========== ========
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 June 30, 2000, and the unaudited statements of operations and
unaudited consolidated statements of cash flows for the six month periods ended
June 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
six months ended June 30, 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 six months 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 six months ended June 30, 2000 the Company also incurred a net loss of
$1.9 million before a one time gain of $2.1 million, related to the sale of a
portion of its investment in uMember. Working capital was a $0.4 deficit million
versus a $6.5 million deficit at December 31, 1999. The Company's business plan
forecasts a return to profitability during the second half of 2000, which is not
guaranteed, 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 six months 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. The Company also
finalized a $3.5 million convertible preferred share private placement in May
2000, (see Note 6). 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 which expires
on August 27, 2000 has been verbally extended for another six months through
February 27, 2001. The Company has reached an agreement on the material terms of
the extension and is in the final stages of completing the written documentation
of the extension. Prior to February 27, 2001 the Company will seek to make this
facility permanent or pursue other facilities. There can be no assurance that
the six month extension will be finalized or a permanent line will be obtained.
Failure to finalize the documentation on the six month extension or obtain a new
line will have severe adverse consequences for the Company.
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.
On May 16, 2000, we finalized our acquisition of Western Technologies
Group, LLC (Westech) of Corona, California. Westech is a rapidly growing
Internet developer and provider of online procurement applications, full desktop
development and website hosting. It specializes in developing websites for
e-commerce companies. The purchase price consists entirely of the assumption of
certain liabilities, which total approximately $500,000 in exchange for assets.
The purchase will be treated as an asset purchase with an assumption of
liabilities.
On June 5, 2000, we completed the purchase of certain assets and
assumption of certain liabilities of Pacific Online Computers, Inc. d/b/a Online
Connecting Point, a regional enterprise technology management firm with revenues
of approximately $61 million in fiscal 1999. The purchase consisted of a
combination of $1.3 million in cash, a $1.2 million note payable and the
assumption of approximately $160,000 in liabilities. The note payable is
contingent upon meeting certain performance requirements (as defined in the
agreement). The calculation is done monthly with a maximum earn out of $25,000
per month through October 2002. As of June 30, 2000 the note payable has not
been recorded as part of purchase price. The assets purchased include fixed and
intangible assets. Liabilities assumed were the accrued vacation of Online
employees that the company hired. Online is Southern California-based and
provides businesses with hardware configuration, customer software image
management, product delivery and maintenance. We assumed Online's customer
contracts and employed virtually all of their approximately 120 employees. The
majority of these employees are
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technical service employees, working onsite at customer locations. We believe
that the Online acquisition strengthens both our Southern California presence as
well as our ability to offer technical services.
The following unaudited pro forma consolidated results of operations have been
prepared as if the acquisitions of Kennsco, Westech, and Online had occurred as
of the beginning of fiscal 1999.
Six Months Ended June 30,
-------------- -------------
2000 1999
-------------- -------------
(unaudited)
Net Sales $ 108,316,711 $ 102,357,634
Net (Loss) Income $ (4,605,509) $ 54,380
Net (Loss) Income Per Basic Common Share $ (0.40) $ 0.01
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 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 $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 as a capital transaction. As a result of
the reduction in ownership percentage, uMember is being unconsolidated as of
March 16, 2000 and will be accounted for under the equity method of accounting.
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.
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Six Months Ended June 30,
-------------------------------
2000 1999
------------ ------------
Net Sales $ 104,063 --
Cost of Goods Sold 167,745 --
------------ ------------
Gross Profit (63,682) --
Selling, General & Administrative Expenses 1,966,842 123,524
------------ ------------
Loss from Operations (2,030,524) (123,524)
Interest Expense (35,969)
(2,449)
Other Income (Expense) -- --
------------ ------------
Loss Before Taxes (2,066,493) (125,973)
Provision (Benefit) for Income Taxes
800 800
------------ ------------
Net Loss $ (2,067,293) $ (126,773)
============ ============
Net Loss Per Common Share of Common Stock $ (0.14) $ (0.02)
============ ============
Average Common Shares Outstanding 14,686,000 5,000,000
============ ============
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NOTE 3 - 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 1,219,000 and
2,490,000 options and warrants whose exercise price was less than the market
price at June 30, 2000 and 1999 respectively. Additionally, there were
approximately 1,041,000 and 10,000 options and warrants whose exercise price
exceeded the market price at June 30, 2000 and 1999 respectively. The potential
dilutive effect of these options and warrants was approximately 116,000 at June
30, 2000.
Net Income (Loss) Per Common Share (in thousands, except per share amounts)
Net income (loss) per common share is calculated as follows: (Unaudited)
Six Months Ended June 30,
---------------------------------------------------------------------------
2000 1999
----------------------------------- -----------------------------------
Net Per-Share Net Per-Share
Income Shares Amount Loss Shares Amount
------- ------- --------- ------- ------- ---------
(net income and shares in 000s)
Net Income $ 207 (463)
Less: Preferred Stock Dividends (352)
-------
Basic earnings per share
Income avail. to common shareholders (145) 11,552 (0.01) (463) 10,669 $(0.04)
====== ======
Effect of Dilutive Securities
Common stock and warrants -- 116 -- 5
------- ------- ------- -------
Diluted earnings per share
Net income (loss) available to
common stockholders plus
assumed conversions $ (145) 11,668 $(0.01) (463) 10,674 $(0.04)
======= ======= ====== ======= ======= ======
NOTE 4 - 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
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level. The total assets at each region are insignificant and therefore, are not
allocated. The accounting policies of the segments are the same as those
described in Note 1 to the December 31, 1999 financial statements included in
the Company's Form 10-K filed with the Securities and Exchange Commission.
Financial information by geographic areas is as follows:
For the three months ended June 30, 2000
Corporate
West Coast Mid-West East Coast Expenses Consolidated
---------- --------- ---------- ----------- ------------
Revenue 41,087,887 3,900,959 590,703 -- 45,579,549
Gross Profit 4,775,357 1,045,420 81,040 -- 5,901,817
Expenses 2,065,116 1,020,900 58,850 2,473,575 5,618,441
Income (Loss) from Operations 2,710,241 24,520 22,190 (2,473,575) 283,376
For the three months ended June 30, 1999
Corporate
West Coast Mid-West East Coast Expenses Consolidated
---------- --------- ---------- ----------- ------------
Revenue 37,655,224 4,231,954 695,987 -- 42,583,165
Gross Profit 3,722,778 1,426,763 115,192 -- 5,264,733
Expenses 1,701,200 1,303,293 76,479 1,870,949 4,951,920
Income (Loss) from Operations 2,021,578 123,470 38,713 (1,870,949) 312,813
For the six months ended June 30, 2000
Corporate
West Coast Mid-West East Coast Expenses Consolidated
---------- --------- ---------- ----------- ------------
Revenue 73,599,467 7,736,882 1,532,791 -- 82,869,140
Gross Profit 7,633,545 1,942,052 194,855 -- 9,770,452
Expenses 3,661,082 2,046,854 110,249 4,401,530 10,219,715
Income (Loss) from Operations 3,972,463 (104,802) 84,606 (4,401,530) (449,263)
For the six months ended June 30, 1999
Corporate
West Coast Mid-West East Coast Expenses Consolidated
---------- --------- ---------- ----------- ------------
Revenue 65,003,292 4,231,954 1,561,886 -- 70,797,132
Gross Profit 6,567,808 1,426,763 218,161 -- 8,212,732
Expenses 3,333,146 1,303,293 149,635 3,511,991 8,298,064
Income (Loss) from Operations 3,234,662 123,470 68,526 (3,511,991) (85,332)
NOTE 5 - NON-EMPLOYEE WARRANTS and STOCK OPTIONS
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
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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.
In May 2000, the Series B warrants were repriced at $1.50 per share. The
increase in fair value of the warrants as of the date of the repricing was
$345,000, and was recorded in stockholder's equity in the accompanying
consolidated financial statements. The warrants were valued using the Black
Scholes option pricing model with the following weighted assumptions: 0 dividend
yield, expected volatility of 81.23%, weighted average risk-free interest rate
of 5.7%, and expected life of two years.
In June 2000 the Company issued 60,000 stock options exercisable at between
$2.25 to $3.00 per share for investment services to an individual and a
corporation. Compensation expense has been deferred and will be recognized
over the related service period.
NOTE 6 - CONVERTIBLE PREFERRED SHARES
On May 2, 2000 Wareforce finalized a $3.5 million convertible preferred
share private placement. Wareforce issued 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 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. 116,667 five-year warrants were issued in connection with the preferred
stock issuance. The warrants are convertible at 125% of the bid price on the
closing date. In addition, we issued common stock, 64,167 common shares, and
182,354 warrants to purchase shares of common stock at $4.19 per share, as
finders' fees in connection with the private placement.
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:
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The following table sets forth certain financial data as a percentage of sales
for the periods indicated:
Three month's ended Six month's ended
------------------- ------------------
6/30/00 6/30/99 6/30/00 6/30/99
------- ------- ------- -------
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 87.0% 87.6% 88.2% 88.4%
----- ----- ----- -----
Gross Profit 13.0% 12.4% 11.8% 11.6%
Selling, General & Administrative 12.3% 11.7% 12.3% 11.7%
----- ----- ----- -----
Operating Income (Loss) 0.7% 0.7% -0.5% -0.1%
Interest Expense -0.6% -0.4% -0.6% -0.5%
Interest Income 0.1% 0.0% 0.1% 0.0%
Other Income (Expense) -0.1% 0.0% 2.5% -0.1%
Minority Interest -1.1% 0.0% -1.1% 0.0%
----- ----- ----- -----
Income (Loss) Before Taxes -1.0% 0.3% 0.3% -0.7%
Provision (Credit) for Taxes 0.0% 0.0% 0.0% 0.0%
----- ----- ----- -----
Net Income (Loss) -1.0% 0.3% 0.3% -0.7%
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Comparison of the three months and six months ended June 30, 2000 and 1999.
NET SALES. During the second quarter of 2000 net sales were $45.5
million compared to $42.6 million for the comparable period in 1999. This is an
increase of $2.9 million or 6.8%. This was primarily attributable to the
acquisition of Pacific Online, purchased on June 5, 2000 which accounted for
$5.0 million of the growth offset by a decrease of $(2.3) million in current
business of Wareforce. This decrease was primarily due to the loss of software
licensing revenue caused by the expiration of the State of Florida Microsoft
Contract and the termination of our LAR (Large Account Reseller) agreement with
Microsoft as of June 30, 2000. The loss of this revenue is not expected to
materially affect the Company due to the low margins of this business. The
increase in revenues of $2.9 million was achieved primarily by a $7.4 million
increase in hardware, and a $(5.9) million decrease in software licensing.
Revenue in software, service and web development accounted for the remaining
$1.4 million increase.
Net sales for the six months ended June 30, 2000, were $82.9 million
compared to $70.8 million for the comparable period in 1999. This is an increase
of $12.1 million or 17.1%. This increase is attributable as follows: $5.0
million due to the acquisition of Pacific Online, $3.4 million due to the
increased sales to an existing Wareforce customer, $3.5 million due to including
Kennsco for six months in 2000 and only three months in 1999, and $0.2 million
due to the acquisition of Westech, a Web development company acquired on May 15,
2000.
GROSS PROFIT. As a percentage of net sales our gross profit margin (GPM)
during the second quarter of 2000 was 13.0% compared to 12.4% for the same
period in 1999. There were a number compensating changes contributing to the
margin. At the end of 1999 Apple changed their business model and no longer used
independent sales agents to augment their sales force. This resulted in a
change of $(0.9) million in gross margin or (2.2) percentage points of GPM. An
increase in gross margin
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of $1.3 million for hardware or 2.5 percentage points more than offset this
decrease. The better hardware GPM was due to higher manufacturer rebates in 2000
compared to 1999. A true up of rebate accruals during June 2000 of $0.7 million
contributed 1.3 percentage points to the GPM. Technical service margins
contributed (0.7) percentage points less in 2000 than they did in 1999. This was
due to increased competition in the technical services marketplace. Increased
competition in the software licensing business accounted for a $(0.3) million
reduction or a (0.7) percentage point decrease. Overall these changes increased
the overall margin by 0.5 percentage points.
For the six months ended June 30, 2000 our gross margin was 11.8%
compared to 11.6% for the same period last year. The .2% improvement for the six
months was primarily due to improved hardware gross margins and an accrual
reversal in the second quarter.
SELLING, GENERAL, & ADMINISTRATIVE EXPENSES (SG&A). SG&A for the second
quarter of 2000 as well as for the six months ended increased to 12.3% from
11.7%, as a percentage of sales, compared to the comparable periods of 1999.
This increase of $0.7 million is primarily due to following: Expenses incurred
in preparing for entry into the European marketplace accounted for $0.3 million,
the hiring of senior management in the quarter into previously vacant positions
including a new president, Chief Information Officer, and Corporate Controller
accounted for $0.2 million, increased Information Systems costs to enhance our
information technology infrastructure added $0.1 million and the acquisition of
Westech, a web development company added $0.1 million.
INTEREST EXPENSE. Interest expense increased to $259,000 from $176,000 in the
three months ended June 30, 2000 over the comparable period in 1999.
Approximately $48,000 was due to increased borrowing and $35,000 was due to
increased interest rate from 7.75% per annum in 1999 rising to 9.5% per annum in
2000. The increased borrowing is due to hardware being a higher percentage of
the business in 2000 and an increase in deferred compensation arising from
higher rebates for the hardware business. The manufacturers pay their rebates
slower than the terms we receive from the distributors which increases the
company's borrowing.
For the six months ended June 30, 2000 interest expense increased to $566,000
from $321,000 over the comparable period in 1999. Approximately $145,000 was due
to increased borrowing and $100,000 was due to increased interest rates from
7.75% per annum in 1999 rising to 9.5% per annum in 2000.
OTHER INCOME. Loss of uMember accounted for on the equity method was $(438,000)
for the three months ended March 31, 2000 and $(949,000) for the six months
ended June 30, 2000. In the comparable periods in 1999 uMember was a
consolidated subsidiary and therefore was not accounted for on an equity method.
For the six months ended June 30, 2000 gain on shares sold in uMember was 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 $2.3 million, net of selling
costs.
LIQUIDITY AND CAPITAL RESOURCES
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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 financing companies.
Currently we have a $30 million line of credit that is scheduled to expire on
August 27, 2000. We have reached an agreement on the material terms of a six
month extension and are in the final stages of completing the written
documentation of the extension. Prior to February 27, 2001 we will seek to make
this facility permanent or pursue other facilities. There can be no assurance
that the six month extension will be finalized or a permanent line will be
obtained. Failure to finalize the documentation on the six month extension or
obtain a new line will have severe adverse consequences for us.
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 (9.50% at June 30, 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 June 30, 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 $24.2
million as of June 30, 2000.
The line of credit also includes inventory financing through Bank of
America Commercial Finance, formerly, 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.
Bank of America Commercial Finance has given us notice that effective
August 27, 2000 they will no longer provide a flooring facility to us. We have
reached an agreement with another flooring facility with substantially the same
terms and are in the final stages of completing the written documentation of the
agreement. Prior to February 27, 2001 we will seek to make this facility
permanent or pursue other facilities. There can be no assurance that this
agreement will be finalized or a permanent flooring facility will be obtained.
Failure to obtain a new agreement will have severe adverse consequences for us.
Compared to December 31, 1999, total assets grew 38.6% to $55.9 million
and stockholders' equity grew 1475% to $4.9 million. Working capital improved
during the quarter from ($6.5) million at December 31, 1999 to ($0.4) million at
June 30, 2000. The Company used $(9.1) million in cash from operations for the
six months ended June 30, 2000 compared to $(9.4) million deficit in cash from
operations during the six months ended June 30, 1999. The month of June
typically is a larger sales month than other months because it is fiscal year
end for a
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couple of our larger customers. Because of this, a significant amount of capital
is tied up in accounts receivable at month end.
The Company's investing activities during the six months ended June 30,
2000 generated cash of $0.5 million. Sale of 1,085,000 shares of uMember held by
Wareforce generated $2.3 million net of selling costs. This was offset by the
purchase of Pacific Online, which was paid, in part, by $1.3 million in cash.
Another $0.5 million was used for the purchase of property and equipment. In the
comparable six months of 1999, $0.8 million cash was used in the acquisition of
Kennsco, and $0.6 million was used to acquire property and equipment.
Net cash provided by financing activities in the six months ended June
30, 2000 was $11.0 million. The Company raised $3.4 million in cash from the
issuance of 454,545 shares of preferred shares. In addition it raised $1.9
million by the exercise of warrants. Increased borrowing on the line of credit
was $5.6 million and long term debt increased by $0.2 million. Net cash provided
by financing activities for the six months ended June 30, 1999 was $10.3
million. The primary source of this financing activity was the borrowing of $8.3
million against the line of credit coupled with the $2.2 million equity
placement. The large increase in the line of credit was needed to fund the
increase in accounts receivable for the month of June. The cash raised through
the issuance of preferred shares is being used for acquisitions and working
capital.
Many factors relating to obtaining financing are beyond our control.
Decreases or material limitations on the amount of borrowings available to us
under our line of credit or other financing arrangement, inability to secure
financing facilities 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
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lines of credit at December 31, 1999, interest expense would increase by
approximately $93,000 for fiscal year 2000 as compared to 1999.
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.
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REGISTRANT
Date: August 21, 2000
By: /s/ DON HUGHES
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Don Hughes, Chief Financial Officer
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