<PAGE> 1
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, 1999
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: Delaware 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 [ ] NO [X]
As of December 27, 1999, 10,831,948 shares of Common Stock of the Registrant
were issued and outstanding.
<PAGE> 2
- --------------------------------------------------------------------------------
INDEX
WAREFORCE.COM, INC.
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page
- ------ --------------------- ----
<S> <C> <C>
Item 1 Financial Statements
Condensed Consolidated Balance Sheets - September 30, 1999
and December 31, 1998 3
Condensed Consolidated Statements of Operations - Three and
nine months ended September 30, 1999 and September 30, 1998
Condensed Consolidated Statements of Cash Flows - Nine months
ended September 30, 1999, and September 30, 1998. 4 & 5
Notes to Condensed Consolidated Financial Statements -
September 30, 1999 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II OTHER INFORMATION 19
- ------- ---------------------
</TABLE>
<PAGE> 3
WAREFORCE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
(unaudited)
-------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash & Cash Equivalents $ 1,578,101 $ 817,721
Marketable securities 76,022 41,890
Trade receivables, net 22,085,193 19,753,622
Net investment in sales-type leases 1,249,160 -
Other receivables 1,384,459 280,827
Inventories 4,747,410 1,813,543
Prepaid expenses 287,468 225,952
Income Taxes Receivable 253,037 237,000
Deferred tax assets 616,133 631,000
-------------------------------
Total current assets 32,276,983 23,801,555
PROPERTY AND EQUIPMENT, net 1,977,324 1,127,495
OTHER ASSETS 77,120 97,723
GOODWILL, net of amortization of $136,039 at 4,236,974 2,701,731
December 31,1998 and $581,416 at September 30,
1999
-------------------------------
Total assets $ 38,568,401 $ 27,728,504
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 15,160,589 $ 10,923,414
Accounts payable 16,898,600 14,340,586
Accrued expenses 929,098 901,887
Sales Taxes Payable 659,934 670,408
Current portion of long - term debt 816,028 6,637
Customer deposits 2,237,985 660,559
-------------------------------
Total current liabilities 36,702,234 27,503,491
Long - term debt, less current portion 732,825 6,173
-------------------------------
Total liabilities 37,435,059 27,509,664
-------------------------------
Minority Interest (131,545) --
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,
10,135,000 and 10,831,948 shares issued and outstanding
as of December 31, 1998 and September 30, 1999
respectively 10,832 10,135
Additional paid in capital 12,183,544 9,544,241
Stock -- 20,000
Subscription
Unrealized loss on marketable Securities -- (20,783)
Notes receivable and advances
to stockholder (3,375,600) (3,375,600)
Accumulated deficit (7,553,889) (5,959,153)
-------------------------------
Total stockholders' equity 1,264,887 218,840
-------------------------------
Total liabilities and
Stockholders' equity $ 38,568,401 $ 27,728,504
===============================
</TABLE>
<PAGE> 4
WAREFORCE.COM, INC
Consolidated Results of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three month's ended Nine month's ended
--------------------------- ---------------------------
9/30/1999 9/30/1998 9/30/1999 9/30/1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Sales $ 37,473,644 $ 19,336,331 $ 108,270,776 $ 54,259,063
Cost of Sales 32,989,134 17,251,740 95,573,534 48,943,794
------------- ------------- ------------- -------------
Gross Profit 4,484,510 2,084,591 12,697,242 5,315,269
Selling, General &
Administrative 5,478,145 2,717,728 13,776,210 6,702,487
------------- ------------- ------------- -------------
Operating Loss (993,635) (633,137) (1,078,968) (1,387,218)
Interest Expense 177,095 270,961 493,079 503,861
Other (Income) Expense (39,110) (5,274) 22,689 846,036
------------- ------------- ------------- -------------
Loss Before Taxes (1,131,620) (898,824) (1,594,736) (2,737,115)
Provision (Benefit)
for Taxes -- (175,900) -- (533,769)
------------- ------------- ------------- -------------
Net Loss ($ 1,131,620) ($ 722,924) ($ 1,594,736) ($ 2,203,346)
============= ============= ============= =============
Earnings Per Share
Basic and Diluted
Loss Per Share ($0.10) ($0.09) ($0.15) ($0.28)
Weighted Average
Number of Common
Shares Outstanding 10,831,948 8,490,629 10,721,421 7,949,171
</TABLE>
<PAGE> 5
WAREFORCE.COM, INC.
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Operating Activities 1999 1998
----------------------------
<S> <C> <C>
Net loss $(1,594,736) $(2,203,346)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 914,909 221,054
Realized gain (loss) on investments 7,954 (36,426)
Provision for bad debts 78,999 74,997
Deferred tax benefit 14,867 (542,245)
Stock issued for compensation -- 124,376
Minority Interest (131,545) --
Changes in operating assets and liabilities:
Accounts receivable (1,140,915) 1,713,694
Net investment in sales type leases 20,637 --
Other receivables (1,103,631) 885,275
Inventory (2,442,656) 2,250,201
Prepaid expenses 8,680 (157,095)
Income Tax Receivable (21,116) 9,850
Other assets 20,603 (57,295)
Accounts payable 1,713,126 (4,864,630)
Accrued expenses 1,016,964 16,029
----------------------------
Net cash used in operating activities (2,637,860) (2,565,561)
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (862,448) (438,352)
Proceeds from sale of marketable securities (21,304) (178,952)
Purchase of CY Investment Inc. (dba Impres Technology) -- (3,000,000)
Purchase of Kennsco (750,000) --
----------------------------
Net cash used in investing activities (1,633,752) (3,617,304)
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on line of credit 3,359,594 2,116,750
Long term debt borrowings & repayments (605,506) 13,479
Notes receivable and advances to shareholders -- (2,293,768)
Proceeds from issuance of common stock 2,197,500 20,000
Proceeds from convertible debt -- 6,000,000
----------------------------
Net cash provided by financing activities 4,951,588 5,856,461
----------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 679,976 (326,404)
CASH ACQUIRED IN ACQUISITION 80,404 115,086
CASH AND CASH EQUIVALENTS, beginning of year 817,721 383,188
============================
CASH AND CASH EQUIVALENTS, end of period $ 1,578,101 $ 171,870
============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes -- --
Interest $ 493,079 $ 560,293
Non-cash Financing Activities
Conversion of debt into common stock $ 250,000 $ 6,000,000
Stock issued for acquisition of uMember $ 172,500
</TABLE>
<PAGE> 6
WAREFORCE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND GENERAL INFORMATION
In our management's opinion, the unaudited condensed consolidated balance
sheet of Warforce.com at September 30, 1999, and the unaudited condensed
statements of operations and unaudited condensed consolidated statements of cash
flows for the interim periods ended September 1999 and 1998 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 and
nine months ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. You should
read these condensed statements in conjunction with our most recent S-1 filing
with the SEC.
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.
During 1998 and 1999, we concentrated on expanding our sales and developing
our administrative and sales infrastructure. As a result, for the nine months
ended September 30, 1999, we had a working capital deficit of $4,425,251 and a
net loss of $1,594,736. For the year ended December 31, 1998, the working
capital deficit was $3,701,936 with a net loss of $3,189,592. To continue to
progress on our business plan, we plan to raise additional working capital
through private offerings of equity. Our management believes that funds on hand,
available on line of credit and raised in private placements subsequent to
September 30, 1999, will be sufficient to fund its needs through at least
September 30, 2000. We cannot assure you that we will obtain sufficient funds to
execute its business plan or generate positive operating results. In 1999, we
raised $2,160,000 in private placements.
This Form 10-Q contains forward-looking statements, which involve risks and
uncertainties. Our actual results may differ significantly from the results
discussed in the forward-looking statements. You should not regard their
inclusion as a representation by us that the objectives or plans will be
<PAGE> 7
achieved. Factors that might cause such a difference include, but are not
limited to, competitive, technological, financial and business challenges making
it more difficult than expected to continue to sell information technology
products and services. We may be unable to retain existing key sales, technical
and management personnel; there may be other material adverse changes in the
information technology industry or in our operations or business, and any or all
of these factors may affect our ability to continue our current rate of sales
growth or may result in lower sales volume than currently experienced.
Certain important factors affecting the forward-looking statements made
herein include, but are not limited to (I) A significant portion of our sales
continuing to be to certain large customers, (II) Continued dependence by us on
certain distributors, (III) Continued downward pricing pressures in the
information technology market, (IV) Quarterly fluctuations in results (V)
Seasonal patterns of sales and client buying behaviors (VI) Changing economic
influences in the industry (VII) The development by competitors of new or
superior delivery technologies or entry in the market by new competitors (VIII)
Our dependence on key personnel, and potential influence by executive officers
and principal stockholders (IX) Volatility of the company's stock price (X)
Delays in the receipt of orders or in the shipment of products (XI) Any delay in
execution and implementation of our system development plans (XII) Planned or
unplanned changes in the quantity and/or quality of the suppliers available for
the company's products (XIII) Changes in the costs or availability of products
(XIV) Interruptions in transport or distribution (XV) General business
conditions in the economy (XVI) Inability to raise additional private or public
capital necessary for development of the Internet business to that of a
profitable enterprise.
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.
<PAGE> 8
This may in turn affect our business, financial position, results of operations
and cash flows. Therefore, you should not place undue reliance on
forward-looking statements contained in this 10-Q. You should also consider the
other risks more fully detailed in our most recent S-1 filing.
NOTE 2 - BASIC NET LOSS PER SHARE
Basic loss per share in the accompanying consolidated financial statements
is calculated in accordance with SFAS No. 128. SFAS No. 128 requires that basic
earnings per share be calculated on weighted average number of common shares
outstanding for the period without giving effect to outstanding common share
equivalents on weighted average number of common shares outstanding.
During a loss period the assumed exercise of in the money stock options
has an anti dilutive effect. There were no in the money options at September
30, 1999. Additionally, out of the money options to purchase approximately
604,233 and 401,483 shares of common stock were outstanding during the nine
months ended September 30, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1999
EPS EPS
Net Loss Shares Amount Net Loss Shares Amount
-------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS ($1,131,620) 10,831,948 ($0.10) ($1,594,736) 10,721,421 ($0.15)
Common Stock Equivalents - - - - - -
-------------------------------------- -------------------------------------
Diluted EPS ($1,131,620) 10,831,948 ($0.10) ($1,594,736) 10,721,421 ($0.15)
====================================== ======================================
</TABLE>
NOTE 3 - SEGMENT REPORTING
We have adopted the disclosure requirements of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related information." SFAS No. 131
establishes standards for additional disclosure about operating segments for
interim and annual financial statements. This standard requires us to disclose
financial and descriptive information for segments whose operating results are
reviewed by our chief operating decision
<PAGE> 9
maker for decisions on resource allocation. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers.
We operate predominately in a single industry segment as a reseller of
computer-based technology products and services. Based on geographic location,
we have three principal segments. These geographic segments are 1) West Coast,
2) Mid West, and 3) East Coast. Our chief operating decision maker manages and
reviews the results of these regions at the revenue, gross margin and income
(loss) form 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 2 - Summary of Significant Accounting
Policies to the audited financial statements included in our Form S-1 filed with
the SEC on November 12, 1999.
SEGMENT REPORTING
Financial information by geographic segment as follows:
For the three months ended September 30, 1999
<TABLE>
<CAPTION>
Corporate
West Coast Mid-West East Coast Expeenses Consolidated
---------- -------- ---------- --------- ------------
<S> <C> <C> <C> <C>
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)
</TABLE>
For the three months ended September 30, 1998
<TABLE>
<CAPTION>
Corporate
West Coast Mid-West East Coast Expeenses Consolidated
---------- -------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Revenue 18,588,209 - 748,122 -- 19,336,331
Gross Profit 1,971,299 - 113,292 -- 2,084,591
Expenses 1,136,965 - 117,549 1,463,214 2,717,728
Income (Loss) from Operations 834,334 - (4,257) (1,463,214) (633,137)
</TABLE>
For the nine months ended September 30, 1999
<TABLE>
<CAPTION>
Corporate
West Coast Mid-West East Coast Expeenses Consolidated
---------- -------- ---------- --------- ------------
<S> <C> <C> <C> <C>
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)
</TABLE>
For the nine months ended September 30, 1998
<TABLE>
<CAPTION>
Corporate
West Coast Mid-West East Coast Expeenses Consolidated
---------- -------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Revenue 52,850,528 - 1,408,535 - 54,259,063
Gross Profit 5,106,296 - 208,973 - 5,315,269
Expenses 2,608,521 - 318,586 3,775,380 6,702,487
Income (Loss) from Operations 2,497,775 - (109,613) (3,775,380) (1,387,218)
</TABLE>
<PAGE> 10
NOTE 4 - CONSOLIDATED PROFORMA STATEMENTS OF OPERATIONS
In August 1998, we acquired the stock of CY for $3 million in cash. The
transaction was accounted for under the purchase method of accounting.
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.
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
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.
Prices of the CY, Kennsco and uMember acquisitions were all determined
based on arms-length negotiations between the parties.
The pro forma effect on our statement of operations had the acquisitions
taken place January 1, 1998 would have been as follows:
<PAGE> 11
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-------------------------------
1999 1998
------------- ------------
<S> <C> <C>
Revenue $ 112,451,710 $ 113,084,025
Loss from Operations (938,874) (1,738,577)
Net Loss ($1,527,612) ($3,607,439)
Basic & Diluted Net Loss Per Share ($ 0.14) ($ 0.45)
Weighted Average Number of Common
Shares Outstanding 10,763,614 8,031,119
</TABLE>
NOTE 5 - SUBSEQUENT EVENTS
In November 1999, our CEO and largest shareholder, Orie Rechtman, agreed to
pledge 3 million of his shares as collateral for a loan for working capital for
uMember. Oxford International, Inc., an investment services firm, has
tentatively agreed to lend up to fifty percent of the value (as quoted on the
National Association of Securities Dealers Electronic Bulletin Board on the date
of loan closing) of the pledged shares. We are currently in the process of
closing this loan. We anticipate that closing, should it occur, will be before
January 7, 2000. However, we have no assurance that this loan will close. If
it does not, we will need to seek alternate sources of funds for uMember's
immediate and long-term financing needs. We are currently investigating such
funding sources but have no commitments for funding in place. Both uMember and
us will be detrimentally impacted it we cannot find funding.
ITEM 2
MANAGEMENT DISCUSSION & ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
The forward-looking statements included in Management's Discussion and Analysis
of Financial Condition 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:
<TABLE>
<CAPTION>
Three month's ended Nine month's ended
------------------------ ----------------------
09/30/1999 09/30/1998 09/30/1999 09/30/1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 88.0% 89.2% 88.3% 90.2%
----- ----- ----- -----
Gross Profit 12.0% 10.8% 11.7% 9.8%
Selling, General & Administrative 14.6% 14.1% 12.7% 12.4%
----- ----- ----- -----
Operating Income(Loss) (2.6)% (3.3)% (1.0)% (2.6)%
Interest Expense 0.5% 1.4% 0.5% 0.9%
Other (Income)Expense (0.1)% (0.1)% 0.0% 1.5%
----- ----- ----- -----
Income(Loss) Before Taxes (3.0)% (4.6)% (1.5)% (5.0)%
Provision(Credit) for Taxes - (0.9)% - (0.9)%
===== ===== ===== =====
Net Income(Loss) (3.0)% (3.7)% (1.5)% (4.1)%
===== ===== ===== =====
</TABLE>
Comparison of the third quarter and nine months ended September 30,1999 and
1998.
NET SALES. During the third quarter of 1999 net sales were $37.5 million
compared to $19.3 million for the comparable period in 1998. This is an increase
of $18.2 million or 93.8%. This was attributable to the acquisition of CY in
September 1998 and Kennsco in March 1999. CY added $19.1 million in the quarter
<PAGE> 12
ended September 30, 1999, versus $4.4 million for the quarter ended September
30, 1998, which represented only one month's activity for that quarter. Kennsco
added $3.5 million in the quarter just concluded. Wareforce sales decreased
slightly.
Net sales for the nine months ended September 30, 1999, increased $54.0
million, or 99.5%, to $108.3 million from $54.3 million for the same period in
1998. The acquisitions of CY and Kennsco added $46.3 million and $7.7 million,
respectively. Wareforce sales during this period remained flat.
GROSS PROFIT. As a percentage of net sales our gross margin increased to
12% from 10.8% for the comparable period in 1998. The primary factor
contributing to this 1.2% increase is our continued focus on expanding our
technical services capabilities, which provide higher margins. Kennsco
contributed 1.8% to the overall consolidated margin, which was offset by a
reduction of .6% in the CY/Wareforce business.
During the nine months ended September 30, 1999 the gross margin as a
percentage of sales increased to 11.7% from 9.8% for the comparable period in
1998. Contributing significantly to this increase of 1.9% was the Kennsco
acquisition, adding 1.5%, while the CY/Wareforce business added .4%.
SELLING, GENERAL, & ADMINISTRATIVE EXPENSES. During the third quarter of
1999 selling, general and administrative expenses were $5.5 million compared to
$2.7 million for the comparable period in 1998. This is an increase of $2.8
million. The acquisitions of CY and Kennsco added $800,000 and $1.2 million
respectively. In addition, the majority interest acquired in uMember in March
1999 added another $300,000. The remaining increase of $500,000 was attributable
to Wareforce. The latter was due to an increase in our bad debt reserve of
$250,000, while the remainder was attributable to our efforts to support our
becoming a public company and other expenses to enhance our technical services
capabilities. As a percentage of net sales, selling general and administrative
expenses increased to 14.6% from 14.1% on a consolidated basis.
<PAGE> 13
For the nine-month period, selling, general, and administrative expenses
increased $7.1 million, or 105.5% to $13.8 million, from $6.7 million in the
comparable period in 1998.
In absolute terms the $7.1 million increase was primarily due to the
acquisitions mentioned above. CY contributed $3.2 million, Kennsco contributed
$2.5 million, and uMember contributed $400,000. Wareforce added $1.0 million for
some of the aforementioned reasons and the necessity to build and maintain the
infrastructure in order to support the additional revenues created by the
acquisitions. As a percentage of net sales, selling, general, and administrative
expenses increased slightly to 12.7% from 12.4% on a consolidated basis.
However, CY/Wareforce selling, general, and administrative expenses decreased by
1.6% during this period. This was offset by 1.9% due to the acquisitions of
Kennsco and uMember.
INTEREST EXPENSE. Interest expense decreased in the three months and nine
months ended September 30, 1999 over the same periods in 1998 by $94,000 and
$11,000 respectively. Through the refinancing of our credit line in August 1998
with a more favorable interest rate, a reduction in the prime rate, and better
cash management, we were able to reduce our interest expense.
OTHER INCOME/EXPENSES. Other income increased slightly during the three
months ended September 30, 1999, over the same period in 1998. On a nine-month
basis other expenses in the 1998 period included over $800,000 of one-time
expenses associated with the raising of $6.0 million in financing. There are no
such charges in 1999.
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
<PAGE> 14
with various financing companies. Beginning in 1998, we began obtaining outside
financing through the private placements of convertible, subordinated debt and
equity. In March 1998, we issued $6 million of 12% convertible, subordinated
debentures. By June 1998 the debenture holders had converted their entire
debentures into $6 million of equity. In early 1999, we raised an additional
$2.4 million as part of a $4 million private equity offering. In consultation
with the placement agent, we have agreed to postpone raising the remaining $1.6
million of this equity placement until more favorable market conditions exist
for its placement. Currently, we have a $30.0 million line of credit that was
obtained on August 27, 1998 and expires on August 27, 2000 but may be renewed by
mutual agreement through August 27, 2001. This line replaced a $15 million line
we had with another lender.
As of December 31, 1998, and September 1999 we had a working capital
deficit of $(3.7) million and $(4.4.) million respectively. Our management
believes that funds on hand and funds available through our credit line will be
sufficient to fund our needs through at least September 30, 2000. We cannot
assure you that we will obtain sufficient funds to execute our business plan or
generate positive operating results. We anticipate that we will have negative
cash flows for the foreseeable future as we aggressively seek additional mergers
with, and acquisitions of, electronic commerce and technical services firms. We
cannot assure you that we will not require additional funds over the next twelve
months.
The net cash flows used for operating activities totaled $2.6 million
for the nine-month period ended September 30, 1999. This resulted from a net
loss of $1.6 million for the period with an increase in accounts receivable and
inventory of $1.2 million and $2.5 million, respectively partially offset by a
decrease in accounts payable and accrued expenses of $2.7 million.
Net cash flows used in investing activities for the nine month period
ended September 30, 1999 was 1.6 million. Investing activity for this period
included $750,000 used for the purchase of the assets of Kennsco and
approximately $850,000 for the
<PAGE> 15
purchase of computer licenses and computer equipment for our internal use. A
portion of this went for licenses to upgrade our internal systems to ones that
are Year 2000 compliant. Net cash flows used in investing activities for the
nine-month period ended September 30, 1998 totaled $3.6 million. Investing
activity for this period included $3.0 million for the purchase of CY and
approximately $640,000 for the purchase of equipment, primarily computer
equipment for internal use.
Net cash flows provided by financing activities for the nine-month period
ended September 1999 was $5.0 million. The sources of this financing activity
were our $2.2 million equity placement plus a net increase of $2.8 million in
our outstanding borrowings. Net cash flows provided by financing activities for
the nine-month period ended September 30, 1998 was $5.9 million. The primary
source of this financing activity was the issuance of $6.0 in convertible debt
which was subsequently converted to equity and an increase in our line of credit
of $2 million partially offset by the $2 million lent to Mr. Rechtman for him to
acquire the shares of Wareforce then-held by Ms. Gabriel.
We have a line of credit that is provided to us by Congress Financial
Corp. (Western). 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 (8.25% as of September 30, 1999) and
may be raised to the prime rate plus two percent under certain conditions. It is
also subject to certain covenants; primarily we are required to maintain an
adjusted net worth of not less than $3.5 million. Also, our loans to Mr.
Rechtman cannot total more than $3.8 million. As of September 30, 1999, these
loans were less than $3.8 million. As of September 30, 1999, we were in
compliance with our covenants. The credit facility is secured by substantially
all of our assets and is personally guaranteed by our majority stockholder, Mr.
Rechtman, who is also our CEO, in the amount of $1.5 million.
<PAGE> 16
Total outstanding borrowings under the revolving line of credit were $8.5
million as of September 30, 1999.
The line of credit includes inventory financing through NationsCredit
Distribution Finance, Inc. Advances under this flooring plan at September 30,
1999 were $6.7 million and are based upon qualified inventory purchases that
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.
In March 1998, Wareforce Incorporated issued in aggregate $6.0 million of
12% subordinated, convertible debentures, maturing one year from the date of
issuance with an option to renew for an additional year. Wareforce Incorporated
paid approximately $900,000 to a third party in connection with raising these
funds. During June 1998, the $6.0 million was converted into equity in exchange
for 2.0 million shares of Wareforce Incorporated common stock. The proceeds of
the debentures were used for the acquisition of CY, a loan to Mr. Rechtman to
acquire the shares of Wareforce then-held by Ms. Gabriel, and general working
capital purposes. See note 11 to the 1998 financial statements.
In February 1999, we issued 600,000 restricted shares of our common stock
in a private placement for $2.4 million. (These funds were part of a $4 million
private placement. In consultation with the placement agent, our management
decided to postpone the placement of the additional $1.6 million of this
placement until more favorable market consist for its placement.) We paid
approximately $250,000 to a third party in connection with raising these funds.
The proceeds from this placement were used by us primarily to complete our asset
purchase of Kennsco, funding start-up costs for uMember.com and general working
capital purposes. We have commitment to fund $1.0 million of uMember's initial
operations and development costs. As of September 30, 1999 we have funded
$640,000 of the $1.0 million commitment. Umember has entered into a loan
agreement with us guaranteeing repayment of the $1 million (or any amounts
advanced
<PAGE> 17
under the agreement) no later than the earlier of February 20, 2001 or the date
of an Initial Public Offering by uMember. By mutual agreement we may extend the
term one additional year. There is no guarantee that uMember will be able to
repay this loan according to its terms or at all. If it cannot, our financial
position will suffer. We are not able to draw from our line with Congress
Financial to fund our commitment to uMember without Congress' permission. If we
cannot fund our full commitment to uMember either it or its minority
shareholders may have recourse against us for full funding and/or costs and
damages.
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.
Wareforce Year 2000 Compliance
Overview
We have developed a program for Y2K issues that consists of the following:
(1) Assessment of our corporate systems and operations that could be
affected by the Y2K issue; and
<PAGE> 18
(2) Repair or replacement of non-compliant systems and components.
We have focused our Y2K compliance assessment program on three principal
areas:
(1) Internal information systems;
(2) Y2K compliance by third-party suppliers and customers; and
(3) Internal non-informational technology systems.
Internal Information Systems
We have completed an inventory and risk assessment of our own information
systems. We have determined that most of our internal systems are fully Y2K
compliant. These include our main enterprise application servers, local
networks, wide area networks, intranet, operating systems, workstations,
Internet applications, shipping systems, EDI systems, telephone systems, and
email servers and applications. However, our recent acquisition, Kennsco, has a
number of workstations and a voice mail system that needs to be upgraded to be
Y2K compliant. These will be upgraded prior to year-end at a cost of under
$50,000. We have not had any other material costs to become Y2K compliant.
Third-Party Suppliers and Customers
We have significant relationships with various suppliers. We currently
obtain the majority of our products from five major distributors, Ingram Micro,
Tech Data, Merisel, Inacom and Pinnacor, as well as from Microsoft. All have
comprehensive Y2K plans in place. Based on their Y2K Readiness Disclosures, we
do not expect the Y2K to have any adverse effect on our relationship. We are
also in the process of sending correspondence to our other vendors, suppliers
and customers requesting their progress as it relates to Y2K readiness. To date,
we have not received any responses from vendors, suppliers, or customers that
would indicate any will face Y2K issues that
<PAGE> 19
will materially impact our business. We continue to actively work with vendors,
suppliers and customers who are not Y2K compliant in order to minimize the
impact on our operations and financial conditions.
Non-Information Technology Systems
We are in the process of completing our assessment of all non-information
technology systems, which includes telephone, alarm and electricity. Based on
the information available, most of the non-information technology systems are
Y2K compliant. We anticipate that all will be compliant before year-end.
Contingency Plans
Our important benchmarks that we set out for ourselves and our internal
benchmarks have been met including in-house testing of the systems. However,
while we are not currently aware of any Y2K issues that would materially affect
our business, and despite the plans we have in place, we may still be adversely
affected by Y2K readiness issues.
Also, we cannot assure you that we will not be the subject of lawsuits
regarding the failure of equipment sold by us in the event the equipment is not
Y2K compliant. Any Y2K related suit could have a material effect on our
business.
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
None
Item 2: Changes In Securities
None
Item 3: Defaults Upon Senior Securities
None
<PAGE> 20
Item 4: Submission of Matters to a Vote of Securities 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 on 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: December 27, 1999 By: /s/ Don Hughes
-----------------------------------
Don Hughes, Chief Financial Officer
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