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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 September 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
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 [ ] NO [X]
As of September 30, 2000 12,167,615 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
September 30, 2000 (unaudited) and December 31, 1999 3
Consolidated Statements of Operations
Three and Nine Month Periods Ended September 30, 2000,
(unaudited) and September 30, 1999 (unaudited) 4
Consolidated Statements of Cash Flows
Nine Month Periods Ended September 30, 2000
(unaudited), and 1999 (unaudited) 5
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial 13
Conditions and Results of Operations
PART II OTHER INFORMATION 18
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WAREFORCE.COM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2000 December 31, 1999
(Unaudited)
------------ ------------
Assets
Current assets:
Cash $ 826,997 $ 367,726
Trade receivables, net of allowance of $406,982 and $356,930 at
September 30, 2000, and December 31, 1999, respectively 36,919,664 24,518,262
Investment in sales-type leases-current 1,085,229 865,142
Other receivables 2,275,836 1,331,944
Inventories 3,984,112 3,786,818
Prepaid expenses 514,221 559,227
Income taxes receivable -- 220,166
Deferred tax assets 525,739 631,000
------------ ------------
Total current assets 46,131,798 32,280,285
Property and equipment, net 3,418,274 2,236,125
Investment in uMember 366,960 --
Investment in sales-type leases, net of current 1,610,228 1,556,054
Other assets 214,643 72,058
Related Party Receivable 181,079 --
Goodwill, net of amortization of $1,276,682 and $783,820
at September 30, 2000 and December 31, 1999, respectively 3,801,929 4,147,386
------------ ------------
Total assets $ 55,724,911 $ 40,291,908
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 27,963,484 $ 18,591,340
Current portion of long - term debt 1,098,831 1,117,819
Accounts payable 14,308,554 17,016,287
Accrued expenses 977,941 812,703
Notes Payable 128,313 --
Sales taxes payable 1,417,061 554,903
Customer deposits 1,416,767 704,542
------------ ------------
Total current liabilities 47,310,951 38,797,594
Long - term debt, less current portion 1,645,095 1,437,111
------------ ------------
Total liabilities 48,956,046 40,234,705
------------ ------------
Commitments
Minority interest -- (251,999)
Redeemable convertible series A preferred stock 3,348,915 --
454,545 shares issued and outstanding
as of September 30, 2000. None at December 31, 1999
undesignated preferred stock $.001 par value,
5,000,000 shares authorized
Stockholders' equity:
Common stock, $.001 par value, 50,000,000 authorized, 12,167,615
and 10,831,948 shares issued and outstanding
as of September 30, 2000 and December 31, 1999, respectively 12,168 10,832
Additional paid-in capital 18,433,703 13,105,544
Deferred compensation (202,871) --
Notes receivable and advances to stockholder (3,399,499) (3,399,999)
Accumulated Deficit (11,423,551) (9,407,175)
------------ ------------
Total stockholders' equity 3,419,950 309,202
------------ ------------
Total liabilities and stockholders' equity $ 55,724,911 $ 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 month's ended Nine month's ended
--------------------------------- ---------------------------------
9/30/00 9/30/99 9/30/00 9/30/99
------------- ------------- ------------- -------------
Net Sales $ 51,635,103 $ 37,473,644 $ 134,504,243 $ 108,270,776
Cost of Sales 45,023,857 32,989,134 118,122,545 95,573,534
------------- ------------- ------------- -------------
Gross Profit 6,611,246 4,484,510 16,381,698 12,697,242
Selling, General & Administrative 6,787,874 5,478,145 17,005,129 13,776,210
------------- ------------- ------------- -------------
Operating Loss (176,628) (993,635) (623,431) (1,078,968)
Interest Expense (471,242) (178,810) (1,037,397) (493,079)
Interest Income 14,675 1,715 103,302 --
Other (Expense) Income (62,563) 39,110 2,017,482 (22,689)
Equity Loss in uMember (276,166) -- (1,225,036) --
------------- ------------- ------------- -------------
Loss Before Taxes (971,924) (1,131,620) (765,080) (1,594,736)
Provision (Benefit) for Taxes -- -- -- --
------------- ------------- ------------- -------------
Net Loss ($ 971,924) ($ 1,131,620) ($ 765,080) ($ 1,594,736)
============= ============= ============= =============
Basic and Diluted Loss
Per Common Share $ (0.09) $ (0.10) $ (0.07) $ (0.15)
Shares used to compute basic
loss per share 11,773,259 10,831,948 11,757,259 10,721,421
Shares used to compute diluted
loss per share 11,773,259 10,831,948 11,757,259 10,721,421
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
Nine Months Ended
September 30
-------------------------------
2000 1999
------------ ------------
(Unaudited)
Operating Activities
Net loss ($ 765,080) ($ 1,594,736)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,131,086 914,909
Amortization of deferred compensation 140,063 --
Realized (loss) gain on investment (2,149,977) 7,954
Provision for bad debts 183,094 78,999
Deferred taxes -- 14,867
Equity in net loss of uMember 1,225,036 --
Minority interest -- (131,545)
Changes in operating assets and liabilities:
Accounts receivable (12,442,918) (1,140,915)
Net investment in sales-type leases (274,261) 20,637
Other receivables 241,211 (1,103,631)
Inventory (197,294) (2,442,656)
Prepaid expenses 25,521 8,680
Income tax receivable 127,686 (21,116)
Deferred Tax Asset 197,741 --
Other assets (142,585) 20,603
Accounts payable (2,698,586) 1,713,126
Notes Payable 73,655 --
Sales Tax Payable 834,195 10,474
Customer Deposits 712,225 (1,405,719)
Accrued expenses (471,165) 2,412,209
------------ ------------
Net cash used in operating activities (14,250,353) (2,637,860)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (799,618) (862,448)
Purchase of marketable securities -- (21,304)
Related Party Receivable (181,079) --
Proceeds from shares sold in uMember 2,306,743 --
Cash used in acquisitions (1,385,000) (750,000)
------------ ------------
Net cash used in investing activities (58,954) (1,633,752)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on line of credit 9,372,144 3,359,594
Long term debt repayments (18,988) (605,506)
Long term debt borrowings 207,984 --
Notes receivable and advances to shareholders 500 --
Proceeds from issuance of common stock -- 2,197,500
Proceeds from issuance of Series A preferred stock 3,359,623 --
Dividends Paid (41,883)
Proceeds from exercise of warrants 1,855,827 --
------------ ------------
Net cash provided by financing activities 14,735,207 4,951,588
------------ ------------
NET INCREASE IN CASH 425,900 679,976
CASH ACQUIRED IN ACQUISITION 33,371 80,404
CASH, beginning of period 367,726 817,721
------------ ------------
CASH, end of period $ 826,997 $ 1,578,101
============ ============
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 (continued)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes -- --
============ ============
Interest $ 1,037,397 $ 493,079
============ ============
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 577,983 --
------------ ------------
Goodwill $ 358,354 --
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
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WAREFORCE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND GENERAL INFORMATION
In management's opinion, the unaudited consolidated balance sheet of
Wareforce.com at September 30, 2000, and the unaudited statements of operations
and unaudited consolidated statements of cash flows for the nine month periods
ended September 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
nine months ended September 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 the company's most recent Form 10-K
filed with the SEC on April 13, 2000.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the company 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 nine 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 nine months ended September 30, 2000 the Company also incurred a net
loss of $1.6 million before a one time gain of $2.1 million, related to the sale
of a portion of its investment in uMember and a $1.3 million equity loss in
uMember. Working capital improved to a $1.2 million deficit versus a $6.5
million deficit at December 31, 1999. The Company's business plan projects
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.
The following are events that have taken place that the Company believes
will not have a material impact on its operations. In June 2000 Microsoft did
not renew its LAR (Large Account Reseller) agreement with the Company.
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The loss of this contract in not expected to materially affect the Company due
to the low margins in this business.
In August 2000 the Company terminated its relationship with a lender
that had given the Company a commitment of up to $20 million in debt financing
to fund the Company's acquisition strategy. Over the past several months the
Company has determined that the lender is unable to fulfill its obligation.
The Company plans to raise additional working capital through private
offerings of equity. Management believes that funds on hand and funds available
through its line of credit will be sufficient to fund its needs through December
31, 2000. During the first nine months of 2000, approximately 1,100,000 Series A
warrants and 119,000 Series B warrants were exercised, raising approximately
$2.0 million. In addition, the sale of 1,085,000 shares of Wareforce holdings in
uMember common stock have resulted in proceeds of approximately $2.3 million,
net of selling costs, to Wareforce. The Company also finalized an approximately
$3.2 million, net of selling costs, convertible preferred share private
placement in May 2000 and an approximately $600,000 common stock private
placement in October 2000. 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 credit facility expires on February 27, 2001. The
bank has notified the Company that it does not intend to renew the facility. The
Company is in the process of seeking a new lender to replace the current
financing facility. There can be no assurance that a new lender will be found or
a new facility obtained. Failure to obtain a new credit line will have severe
consequences to the Company. The Company has been advised by its independent
public accountants that if this contingency has not been resolved prior to the
completion of their audit of the Company's financial statements for the year
ending December 31, 2000, (which will also occur around February 27, 2001) their
auditors' report on those financial statements will be qualified as being
subject to the ultimate outcome of that contingency.
The Company guaranteed a $1 million lease obligation for uMember, in
which uMember is currently in default. The Company believes uMember will
negotiate a favorable resolution in relation to the default.
Acquisitions
In March 1999 certain assets and liabilities of Kennsco were acquired
for $750,000 in cash and a note for $250,000, payable in the Company's 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, the Company finalized its 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.
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The purchase will be treated as an asset purchase with an assumption of
liabilities.
On June 5, 2000, the Company 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 $50,000
per month through October 2002. 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. The Company assumed Online's
customer contracts and employed virtually all of their approximately 120
employees. The majority of these employees are technical service employees,
working onsite at customer locations. The Company believes that the Online
acquisition strengthens both its Southern California presence as well as its
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.
Nine Months Ended September 30,
---------------------------------
2000 1999
------------- -------------
Net Sales $ 160,053,989 $ 123,998,670
Net Loss $ (1,685,206) $ (379,269)
Net Loss Per Basic Common Share $ (0.14) $ (0.04)
NOTE 2 - uMEMBER
In April 1999 the Company exchanged 30,000 shares of its 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 the Company's common stock as
quoted on the NASD Electronic Bulletin Board. As there were no assets or
liabilities on the date of the Company's 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 is accounted for as a reverse merger acquisition,
which resulted in a recapitalization of uMember in as much as it is deemed to be
the acquiring entity for
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accounting purposes. The Company's ownership in uMember will be diluted as a
result of 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 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 uMember's financial position as a stand-alone
company for the periods indicated.
uMember
Statements of Operations
(Unaudited)
Nine Months Ended September 30,
-------------------------------
2000 1999
------------ ------------
Net Sales $ 546,826 $ --
Cost of Goods Sold 680,775 --
------------ ------------
Gross Profit (133,949) --
Selling, General & Administrative Expenses 2,637,848 348,124
------------ ------------
Loss from Operations (2,771,797) (348,124)
Interest Expense 0 (11,603)
Other Income (Expense) -- --
------------ ------------
Loss Before Taxes (2,771,797) (359,727)
Provision (Benefit) for Income Taxes 800 800
------------ ------------
Net Loss $ (2,772,597) $ (360,527)
============ ============
Net Loss Per Common Share of Common Stock $ (0.19) $ (0.07)
============ ============
Average Common Shares Outstanding 14,953,416 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 no options or
warrants whose exercise price was less than the market price at September 30,
2000 and 1999. Additionally, there were approximately 3,260,352 and 604,233
options and warrants whose exercise price exceeded the market price at September
30, 2000 and 1999 respectively.
Nine Months Ended September 30
-----------------------------------------
(Net loss and shares in 000's)
------------------------------
2000 1999
------------------------------------ -------------------------------------
Basic & Diluted Net Loss Net Per-Share Net Per-Share
per Common Share Loss Shares Amount Loss Shares Amount
---- ------ ------ ---- ------ ------
Net Loss ($765) 11,757 ($1,595) 10,721
Less: Preferred Stock Dividends (112) --
---------- -------
Loss available to common shareholders
and basic and diluted loss per share ($877) 11,757 (0.07) ($1,595) 10,721 ($0.15)
========== ====== ===== ======= ====== ======
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 to 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, 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.
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Financial information by geographic areas is as follows:
For the three months ended September 30, 2000
Corporate
West Coast Mid-West East Coast Expenses Consolidated
--------------------------------------------------------------------------------
Revenue 46,461,251 4,257,767 916,085 - 51,635,103
Gross Profit 5,285,983 1,196,532 128,731 - 6,611,246
Expenses 3,286,847 1,207,150 70,136 2,223,741 6,787,874
Income(Loss) from Operations 1,999,136 (10,618) 58,595 (2,223,741) (176,628)
For the three months ended September 30,1999
Corporate
West Coast Mid-West East Coast Expenses Consolidated
--------------------------------------------------------------------------------
Revenue 33,547,703 3,449,835 476,106 - 37,473,644
Gross Profit 3,412,336 1,036,983 35,191 - 4,484,510
Expenses 2,200,965 1,167,712 109,986 1,999,482 5,478,145
Income(Loss) from Operations 1,211,371 (130,729) (74,795) (1,999,482) (993,635)
For the nine months ended September 30, 2000
Corporate
West Coast Mid-West East Coast Expenses Consolidated
--------------------------------------------------------------------------------
Revenue 120,060,717 11,994,649 2,448,877 - 134,504,243
Gross Profit 12,919,528 3,138,584 323,586 - 16,381,698
Expenses 6,947,930 3,254,004 180,384 6,622,811 17,005,129
Income(Loss) from Operations 5,971,598 (115,420) 143,202 (6,622,811) (623,431)
For the nine months ended September 30,1999
Corporate
West Coast Mid-West East Coast Expenses Consolidated
--------------------------------------------------------------------------------
Revenue 98,550,995 7,681,789 2,037,992 - 108,270,776
Gross Profit 9,980,144 2,463,746 253,352 - 12,697,242
Expenses 5,534,111 2,471,005 259,621 5,511,473 13,776,210
Income(Loss) from Operations 4,446,033 (7,259) (6,269) (5,511,473) (1,078,968)
NOTE 5 - SUBSEQUENT EVENTS
On October 24, 2000 the Company entered into a Securities Purchase agreement
whereby it agreed to sell 704,225 restricted shares of its common stock at $0.85
per share, calculated at the average of the closing bid price of the company's
common stock during the ten trading days immediately preceding the signing of
the agreement, to a European investment fund. As part of the agreement, the
Company agreed to issue
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to the fund 400,000 warrants, exercisable over one year, to purchase shares of
the Company's common stock at $0.85 each. The payment for the shares and their
subsequent issuance, along with the issuance of the warrants, is to take place
in three equal installments, on October 24, 2000, December 7, 2000, and January
20, 2001. As part of the agreement, the Company has agreed to use $600,000 of
the proceeds of the sale of stock for a loan to uMember.com, Inc., a related
entity, of which the Company currently owns approximately 40%. In addition to
lending uMember the proceeds from the sale of these shares, the Company, as part
of the loan agreement, has agreed to lend to uMember an additional $600,000. The
Company is not required to distribute any of this additional $600,000 in the
first ninety days after the effective date of Agreement; and the Company is
not required to distribute more than $75,000 in any single month in which such
funds are distributed. One half of the loan matures in one year, with the other
one half becoming a term loan at the end of the first one-year period. The loan
is priced at prime plus one percent. The related party receivable will be
treated as a draw on this uMember loan agreement.
In November 2000 the Shaar Fund and the Triton Private Equities Fund
agreed to waive any penalties owed to them due to the late filing of the S-1
registration statement by the Company. To effect this agreement, Mr. Rechtman,
the Company's CEO and major shareholder, has agreed to place into escrow 400,000
shares he holds personally in the Company's common stock. If the registration
statement is not made effective within 90 days from the date of its initial
filing, these shares will be released from escrow and placed in the name of
Shaar and Triton.
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 Nine month's ended
------------------------------ --------------------------------
9/30/00 9/30/99 9/30/00 9/30/99
------------- ------------- -------------- --------------
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 87.2% 88.0% 87.8% 88.3%
------------- ------------- -------------- --------------
Gross Profit 12.8% 12.0% 12.2% 11.7%
Selling, General & Administrative 13.1% 14.6% 12.6% 12.7%
------------------------------ -------------- --------------
Operating Loss -0.3% -2.6% -0.4% -1.0%
Interest Expense -0.9% -0.5% -0.8% -0.5%
Interest Income 0.0% 0.0% 0.1% 0.0%
Other Income (Expense) -0.1% 0.1% 1.5% 0.0%
Equity loss in uMember -0.5% 0.0% -0.9% 0.0%
------------- ------------- -------------- --------------
Loss Before Taxes -1.8% -3.0% -0.5% -1.5%
Provision for Taxes -0.0% 0.0% -0.0% 0.0%
------------- ------------- -------------- --------------
Net Loss -1.8% -3.0% -0.5% -1.5%
------------- ------------- -------------- --------------
Comparison of the three months and nine months ended September 30, 2000 and
1999.
NET SALES. During the third quarter of 2000 net sales were $51.6
million compared to $37.5 million for the comparable period in 1999. This is an
increase of $14.1 million or 37.8%. This was primarily attributable to the
acquisition of Pacific Online, purchased on June 5, 2000 which accounted for
$17.4 million of the growth offset by a decrease of $(3.3) 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 $14.1 million was achieved primarily by a $19.3 million
increase in hardware, a $2.8 million increase in service and a $(8.9) million
decrease in software licensing. Revenue in software, lease rentals and web
development accounted for the remaining $0.9 million increase.
Net sales for the nine months ended September 30, 2000, were $134.5
million compared to $108.3 million for the comparable period in 1999. This is an
increase of $26.2 million or 24.2%. This increase is attributable as follows:
$22.4 million due to the acquisition of Pacific Online, $(1.2) million decrease
due to the loss of software licensing substantially offset by increased hardware
sales, $4.3 million due to including Kennsco for nine months in 2000 and only
six months in 1999, and $0.7 million due to the acquisition of Westech, a Web
development company acquired on May 15, 2000.
GROSS PROFIT. During the third quarter of 2000 gross profit was $6.6
million compared to $4.5 million for the comparable period in 1999, an increase
of $2.1 million. As a percentage of net sales our gross profit margin during the
third quarter of 2000 was 12.8% compared to 12.0% for the same period in 1999,
an increase of 0.8%. The $2.1 million increase came primarily from hardware,
$1.8 million, and
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service, $0.7 million, offset by a decrease in software licensing of $(0.4)
million. The increase in the gross profit margin percent of 0.8% is primarily
due to the reduction of the software licensing business as a component of gross
profit. For the third quarter 2000,hardware margins were 9.7%, service margins
were 36.1%, and software-licensing margins were 4.8%. Changing the mix of these
product lines increased the overall margin by 0.8%.
For the nine months ended September 30, 2000 gross profit was $16.4 million
compared to $12.7 million for the comparable period in 1999, an increase of $3.7
million or 29.0%. As a percentage of net sales our gross profit margin gross
profit margin was 12.2% compared to 11.7% for the same period last year, a 0.5%
increase. There were a number of compensating changes contributing to the change
in margin. At the end of 1999 Apple changed their business model and no longer
used outside contractors to augment their sales force. This resulted in a change
of $(1.5) million in gross margin or (1.4) percentage points of gross profit
margin. An increase in gross margin of $3.5 million for hardware or 1.6
percentage points more than offset this decrease. The better hardware gross
profit margin was due to higher manufacturer rebates in 2000 compared to 1999. A
reconciliation of rebate accruals of $1.1 million contributed 0.8 percentage
points to the gross profit margin. The software licensing business accounted for
a $(0.8) million reduction or a (0.8) percentage point decrease. Technical
service and Web development accounted for the remaining $1.4 million and 0.3
percentage points change. These changes increased the overall margin by 0.5
percentage points.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES (SG&A) During the third
quarter SG&A increased to $6.8 million compared to $5.5 million for the
comparable period in 1999, a $1.3 million increase. However, as a percent of
revenue SG&A decreased to 13.1% from 14.6% compared to the comparable period in
1999. This increase of $1.3 million is due primarily to expenses of Online, an
acquisition made in June 2000 for $1.3 million.
For the nine months ended September 30, 2000 SG&A increased to $17.0 million
compared to $13.8 million for the comparable period in 1999, a $3.2 million
increase. As a percent of revenue SG&A decreased slightly to 12.6% from 12.7%
compared to the comparable period in 1999. The $3.2 million increase is
primarily due to the acquisition of Online in June 2000 and Westec in May 2000
for $2.0 million. Kennsco was acquired in March 1999 and therefore had nine
months of expenses in 2000 and only six months of expenses in 1999, and
accounted for $0.8 million of the increase, and no longer consolidating uMember
as a subsidiary accounted for $(0.4) million. The remaining increase is due to
expenses incurred in preparing for entry into the European marketplace of $0.3
million, the hiring of senior management into previously vacant positions
including a new President, Chief Information Officer and Controller which
accounted for $0.3 million and increased information systems costs to enhance
our information technology infrastructure which added $0.2 million.
INTEREST EXPENSE. Interest expense increased to $471,000 from $179,000 in the
three months ended September 30, 2000 over the comparable period in 1999.
Approximately $235,000 was due to increased borrowing and $60,000 was due to
increased interest rate from 8.25% per annum in 1999 rising to 10.5% per annum
in 2000. The increased borrowing is due to
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larger hardware dollar amounts to be financed and a delay in receiving rebates
from our vendors. The manufacturers pay their rebates slower than the terms we
receive from the distributors.
For the nine months ended September 30, 2000 interest expense increased to
$1,037,000 from $493,000 over the comparable period in 1999. Approximately
$420,000 was due to increased borrowing and $120,000 was due to increased
interest rates from 8.25% per annum in 1999 rising to 10.5% per annum in 2000.
OTHER INCOME. Loss of uMember accounted for on the equity method was $(276,166)
for the three months ended September 30, 2000 and $(1,225,036) for the nine
months ended September 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 nine months ended September 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
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 $30.0 million line of credit that has been temporarily
increased to $37.5 million. It was obtained on August 27, 1998 and was recently
extended until February 27, 2001.
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 85% of eligible
accounts receivable plus 75% of eligible inventory. However, the bank is
reducing this availability from 85% to 80% of eligible accounts receivable until
such time as Wareforce meets certain bank requirements. At the end of September
the rate was 83.5% and is scheduled to reach 80% by early December; however,
management anticipates compliance with bank requests before that time, returning
the accounts receivable availability to 85% of eligible receivables. Interest is
payable at the lender's prime rate plus one percent (10.50% at September 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 September 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 $28 million as of September 30, 2000.
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The line of credit also includes inventory financing through Deutsche
Financial Services. 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.
Deutsche Financial Services replaced Bank of America Commercial Finance
in August 2000 as the provider of our flooring facility.
The working capital deficit improved during the quarter from ($6.5)
million at December 31, 1999 to ($1.2) million at September 30, 2000. The
Company used $(14.3) million in cash from operations for the nine months ended
September 30, 2000 compared to $(2.6) million from operations during the nine
months ended September 30, 1999.
The Company's investing activities during the nine months ended
September 30, 2000 used cash of ($0.1) 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 $0.8 million was used for the purchase of property and
equipment. In the comparable nine months of 1999, $0.8 million cash was used in
the acquisition of Kennsco, and $0.9 million was used to acquire property and
equipment.
Net cash provided by financing activities in the nine months ended
September 30, 2000 was $14.7 million. The Company raised approximately $3.4
million in cash, net of selling costs, from the issuance of 454,545 shares of
preferred shares. In addition it raised $2.0 million from the exercise of
warrants. Increased borrowing on the line of credit was $9.4 million and long
term debt increased by $0.2 million. Net cash provided by financing activities
for the nine months ended September 30, 1999 was $5.0 million. The primary
source of this financing activity was the borrowing of $3.4 million against the
line of credit coupled with the $3.2 million equity placement.
Our credit facility will expire on February 27, 2001. The bank has
notified us that it does not intend to renew the facility. We are in the process
of seeking a new lender to replace the current financing facility. There can be
no assurance that a new lender will be found or a new facility obtained. Failure
to obtain a new credit line will have severe consequences to the Company.
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 have been advised by our independent public accountants that if a
new credit facility is not in place prior to the completion of their audit of
our financial statements for the year ending December 31, 2000, (which will also
occur around February 27, 2001) the
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auditors' report on those financial statements will be qualified as being
subject to the ultimate outcome of that contingency.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 13"), which is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000, as per the
issuance of SFAS 137, SFAS 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded
in other contracts and for hedging activities. It requires that entities
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The adoption of
SFAS 133 will not have a material effect on the Company's financial position or
the results of its operations.
The Company has adopted Staff Accounting Bulletin Number 101, "Revenue
Recognition Issues," issued December 3, 1999 ("SAB 101"). This pronouncement
states that revenue is generally realized or realizable and earned when all of
the following criteria are met: i) pervasive evidence of an arrangement exists,
ii) delivery has occurred or services rendered, iii) the seller's price to the
buyer is fixed or determinable and, iv) collectibility is reasonably assured.
The adoption of SAB 101 will not have a material impact on the Company's
financial position or the results of its operations.
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.
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
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(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: November 14, 2000
By: /s/ Don Hughes
--------------------------------
Don Hughes, Chief Financial Officer
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