<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 29, 1999
REGISTRATION NO. 333-82327
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
------------------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
WAREFORCE.COM, INC.
(NAME OF BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
NEVADA 5045 87-0542988
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
2361 ROSECRANS AVENUE, SUITE 155, EL SEGUNDO, CALIFORNIA 90245
(310) 725-5555
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PLACE OF
BUSINESS)
DAN J. RICKETTS
2361 ROSECRANS AVENUE, SUITE 155, EL SEGUNDO, CALIFORNIA 90245
(310) 725-5555
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES TO:
THOMAS G. KIMBLE & VAN L. BUTLER
THOMAS G. KIMBLE & ASSOCIATES
311 SOUTH STATE STREET, #440
SALT LAKE CITY, UTAH 84111
(801) 531-0066
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this registration statement.
If any securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the securities act, check
the following box. [X]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
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Common Stock $.001 par value, to be sold
by Selling Shareholders............... 971,448 $3.09* $ 3,001,774 $ 834.49
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Common Stock $.001 par value, underlying
Series A Warrants..................... 1,110,000 $6.00 $ 6,660,000 $1,851.48
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Common Stock $.001 par value, underlying
Series B Warrants..................... 1,110,000 $7.00 $ 7,770,000 $2,160.06
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TOTALS........................ 3,191,448 $17,431,774 $4,846.03
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</TABLE>
* Estimated pursuant to Rule 457(c) solely for the purpose of calculating the
registration fee.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE> 2
WAREFORCE.COM, INC.
2,220,000 WARRANTS AND UNDERLYING SHARES
OF COMMON STOCK AND
971,448 SELLING SHAREHOLDER SHARES
Our company, Wareforce.com, Inc., is registering:
- 1,110,000 Series A Warrants and 1,110,000 Series B Warrants, to be
distributed as soon as practicable after the date of this Prospectus, at
no cost to our common stockholders of record as of July 13, 1998.
- 2,220,000 shares of common stock, to be sold upon exercise of the
Warrants, at prices of $6.00 per share underlying Series A Warrants and
$7.00 per share underlying Series B Warrants.
- 971,448 shares of our common stock held by various selling shareholders
that may sell all or a potion of these shares in market transactions or
negotiated transactions.
Each warrant you hold entitles you to purchase one share of our common
stock, at any time until [the date three years from the date hereof], provided
this prospectus is still current or has been updated. Whether a current
prospectus is in effect or not, we can call and redeem the warrants for $.01 per
warrant, on 30 days notice, at any time after the date of this prospectus.
Our common stock is quoted on the NASD Electronic Bulletin Board under the
Symbol "WFRC". The current bid price quotation is $2.00.
-------------------------
YOU SHOULD NOT PURCHASE THESE SECURITIES IF YOU CANNOT AFFORD TO RISK THE
LOSS OF YOUR ENTIRE INVESTMENT. INVESTING IN OUR COMMON STOCK INVOLVES
SUBSTANTIAL RISKS, SUCH AS THOSE DESCRIBED UNDER "RISK FACTORS" BEGINNING ON
PAGE 6.
-------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------------
We will not receive any of the proceeds from the shares sold by our selling
shareholders. Our warrants are being distributed without cash consideration. The
shares underlying the warrants are being offered only to the holders of the
warrants, and will be sold by us without any underwriting discounts or other
commissions. The offering price of the shares is payable in cash upon exercise
of the warrants. No minimum number of warrants must be exercised, and no
assurance exists that any warrants will be exercised.
The date of this Prospectus is , 1999
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.......................................... 3
RISK FACTORS................................................ 6
DILUTION.................................................... 9
SELECTED FINANCIAL DATA..................................... 11
USE OF PROCEEDS............................................. 12
MARKET INFORMATION & DIVIDEND POLICY........................ 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 14
THE COMPANY................................................. 23
AVAILABLE INFORMATION....................................... 31
MANAGEMENT.................................................. 33
CERTAIN TRANSACTIONS........................................ 47
PRINCIPAL SHAREHOLDERS...................................... 50
DESCRIPTION OF SECURITIES................................... 51
PLAN OF DISTRIBUTION........................................ 53
LEGAL MATTERS............................................... 56
EXPERTS..................................................... 56
CHANGE IN INDEPENDENT ACCOUNTANTS........................... 56
FINANCIAL STATEMENTS........................................ F-1
</TABLE>
2
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights important information. As a summary, it is
necessarily incomplete and does not contain all the information you should
consider before investing. You should read the entire prospectus carefully.
OUR COMPANY
Wareforce.com, Inc. provides computer-related technical services, support,
hardware and software that clients need to design, develop, manage and maintain
their data processing and information systems. Our approach to the market for
information technology is to be a diversified information technology
organization and develop a complete single-source solution for all IT
requirements. Since 1990, our revenues have grown from $2 million in 1990 to
$88.9 million in 1998. Our client base exceeded 1,500 customers in 1998, and is
composed of blue chip Fortune 1,000 corporations, state, county and local
governments and educational institutions such as:
- Pacific Bell,
- Universal Studios,
- Atlantic Richfield (Arco),
- Boeing/Rocketdyne,
- State of Florida,
- Los Angeles County and
- University of California University School System.
During 1998, we began implementing an electronic commerce and technical
services acquisition strategy. In September 1998, we completed the acquisition
of C.Y. Investment Inc. d/b/a Impres Technology and d/b/a Advanced Optical
Distribution, a technical services/ computer products company with net revenues
of $68 million in 1998. This doubled the size of our core business. In March
1999, we completed the purchase of the assets and assumed the liabilities of a
second technical services company, Kennsco, Inc. that generated $18 million in
net revenues in fiscal year 1998 from its operations in the Midwest and Florida.
We also recently began several Internet and e-commerce related initiatives. For
example, in 1998 we became a supplier through an initiative with Commerce One,
Inc. to allow customers to purchase 140,000 computer products from more than 900
vendors through us. In 1999, we established an on-line customer service center
for the convenience of our customers and we also bolstered our web presence and
electronic commerce offerings in online auctions and electronic commerce
technology, through our acquisition of 70% of uMember.com, Inc.
Our principal executive office is at 2361 Rosecrans Avenue, Suite 155, El
Segundo, California 90245. Our telephone number is (310) 725-5555.
3
<PAGE> 5
THE OFFERING
Securities Offered........... 2,220,000 shares of our common stock, underlying
Series A and B warrants. 971,448 shares of our
common stock, being sold by our selling
shareholders. See "Description of Securities".
Offering Prices.............. $6.00 per share underlying Series A warrants;
$7.00 per share underlying Series B warrants.
They can sell these shares in the
over-the-counter market or otherwise. They may
sell at market prices at the time of sale, at
prices related to the market price or at
negotiated prices.
Plan of Distribution......... The shares underlying the warrants will be
offered and sold without any discounts or other
commissions, to the holders of the warrants,
when they exercise them. The shares of the
selling stockholders can be sold in the
over-the-counter market or otherwise. They may
sell at market prices at the time of sale, at
prices related to the market price or at
negotiated prices. See "Plan of Distribution."
Use of Proceeds.............. We could receive as much as $14,430,000 from
sale of the 2,220,000 shares of common stock
issuable upon exercise of Series A and B
warrants, if all warrants are exercised. Any
proceeds will be used generally to provide
additional working capital, but have not been
specifically allocated, since there is no
assurance any warrants will be exercised. We
will receive no proceeds from the sale of the
shares of the selling shareholders.
Transfer Agent............... Interwest Transfer Company, Inc., 1981 East
4800 South, Suite 100, Salt Lake City, Utah
84117, phone (801) 272-9294.
Securities Outstanding....... We are authorized to issue up to 50,000,000
shares of common stock, and 5,000,000 shares of
preferred stock in one or more series with such
rights and preferences as the board of directors
may designate. 10,831,948 shares of common stock
were issued and outstanding as of May 30, 1999.
We have reserved from authorized capital
2,220,000 shares of common stock for issuance
upon exercise of the warrants.
Warrants..................... Each warrant entitles the holder to purchase one
share of common stock at any time up until [the
date three years from the date hereof], provided
this prospectus is still current or has been
updated. Exercise prices are $6.00 per share for
Series A warrants and $7.00 per share for Series
B warrants, subject to adjustment in certain
events. Whether a current prospectus is in
effect or not, we can call and redeem either or
both series of the warrants for $.01 per warrant
on 30 days notice at
4
<PAGE> 6
any time after the date of this prospectus. See
"Description of Securities -- Series A and B
warrants."
Risk Factors................. An investment in Wareforce.com is highly
speculative. Investors will suffer substantial
dilution in the book value per share of the
common stock compared to the purchase price. If
we do not receive substantial funds from
exercise of the warrants, which is not assured,
we may require additional funding for which we
have no commitments. You should not invest if
you cannot afford to risk loss of your entire
investment. See "Risk Factors."
5
<PAGE> 7
RISK FACTORS
These securities involve a high degree of risk. You should carefully
consider the following risk factors and all other information in this prospectus
before investing in our Company.
RISKS RELATED TO OUR FINANCIAL POSITION
We have incurred net operating losses and have accumulated a
deficit. During 1998, and for the six months ended June 30, 1999 we incurred a
net operating loss of $3,189,592 and $463,116 respectively. We had an
accumulated deficit of $5,959,153 as of December 31, 1998 and $6,422,269 as of
June 30, 1998. There is no assurance that we will obtain sufficient funds to
execute our business plan or generate positive operating results. See footnote 1
to the 1998 audited financial statements.
We depend on credit that may not always be available to us. We depend on
availability of accounts receivable financing to obtain capital necessary to
finance purchase of products and to fill sales orders. This financing must be
available to us on reasonable terms and in sufficient amounts sufficient to
maintain or increase sales volume.
RISKS RELATED TO THE NATURE OF OUR BUSINESS
Year 2000 computer problems may affect our customers, our suppliers and our
business operations and financial results. Computer systems, software packages,
and microprocessor dependent equipment may cease to function or generate
erroneous data when the year 2000 arrives. The problem affects systems or
products that are programmed to accept a two-digit code in date code fields. To
correctly identify the year 2000, a four-digit date code field will be required
to be what is commonly termed "Year 2000 compliant." We may have exposure and
risk if the systems on which we depend upon to conduct our day-to-day operations
are not Year 2000 compliant. The potential areas of exposure include electronic
data exchange systems operated by third parties with whom we transact business,
certain products purchased from third parties for resale, and computers,
software, telephone systems and other equipment we use internally. Any of these
Year 2000 issues could have a material adverse effect on our business, financial
condition and results of operations. However, because so many companies,
including us, our customers and suppliers, are subject to Y2K risks, we cannot
accurately assess the quantitative magnitude of this risk factor.
We run the risk that the inventory we hold will lose its value before we
sell it. Our inventory may be adversely affected by price reductions or
technological changes. We have no assurance that our suppliers and distributors
will protect us in all cases from declines in inventory value.
We are in a low margin business and cannot assure you that our margins will
be sufficient enough for us to make a profit. Pricing in our industry is
extremely competitive. This factor makes it unlikely that we can increase profit
margins. Also, in order to attract larger customers, we sell certain products at
or below cost. We cannot always recoup these losses through rebates, incentives
and the sale of higher margin technical services.
The loss of any of our key customers could seriously impact our financial
results. Our customer base is highly concentrated. In 1998, our top ten
customers accounted for
6
<PAGE> 8
approximately 54 percent of our sales. Our contracts and purchase orders do not
generally guarantee any minimum purchases nor require that purchases be made
exclusively from us.
Our customers may return products to us that we cannot return to our
suppliers. We bear the cost of the return if the supplier does not accept the
return from us.
Sales in our industry are increasingly being done on the Internet and we
may not be able to successfully compete on the Internet. We may not be able to
introduce new e-commerce solutions on a timely and cost-effective basis that
keep pace with technological developments and emerging industry standards and
address increasingly sophisticated customer requirements. If we do introduce new
e-commerce solutions, they may have computer glitches and bugs. If we do find
bugs, it might result in the loss of or delay in market acceptance of our
solutions. We also cannot assure you that our security measures will prevent
security breaches into our e-commerce solutions. Because the e-commerce field is
so new, we cannot currently quantify the magnitude of this risk factor on our
business. However we believe if we are unable to compete through e-commerce
within the next two to three years, our business will suffer.
We depend on the services and efforts of our existing senior management and
key personnel. We have long-term employment agreements with most of our key
personnel. We carry $2,000,000 "key person" life insurance on Mr. Rechtman,
which is pledged to our banks. In order to meet expected growth, we must hire,
train, motivate and retain other highly-skilled managerial, marketing, sales,
computer, and information technology professionals, as well as customer service
personnel. Competition for such personnel is intense. We cannot assure you that
we will be successful in attracting, assimilating or retaining the necessary
personnel.
Failure of our computer systems could put your investment at risk. We
depend upon our redundant computer and communications hardware located at a
single leased facility in California. Our systems are vulnerable to
telecommunication failure, computer viruses and similar disruptive problems as
well as damage from natural causes. We believe that each day our systems are
inoperable, we may lose $500,000 a day in revenue. Losses of this magnitude for
more than a week could significantly impact our business.
A majority of our voting stock is owned by a single shareholder. Mr.
Rechtman currently owns 55.0% of our outstanding shares of common stock.
Accordingly, he may continue to be able to elect a portion of our directors and
possibly determine the outcome of corporate actions requiring stockholder
approval, regardless of how you may vote. This may delay, defer or prevent a
change in our control. It may also adversely affect your voting and other
rights.
RISKS RELATED TO THE OFFERING
You are not assured that any proceeds will be received from exercise of
warrants. This increases your risk if you do exercise your warrants, because you
are not assured that any additional warrants will be exercised or that we will
receive further funding. Proceeds may not be sufficient to defray offering
expenses. Because no minimum number of warrants must be exercised there is no
escrow of funds. We will retain any proceeds we receive to use in our business.
The amount of capital currently available to us is limited. In the event any
proceeds from this offering and our existing capital are insufficient for us to
develop and expand our business and generate a profit, we may need additional
financing.
7
<PAGE> 9
However, we do not have any commitments or arrangements from commercial lenders
or other sources for additional financing.
You can exercise your warrants only if this prospectus is effective and
current and the exercise is permitted under the securities laws of your
state. We intend to update the prospectus as necessary to keep it current and
maintain federal and state registration or qualification for the exercise, but
may not be able to do so when you wish to exercise. Whether a current prospectus
is in effect or not, the warrants are redeemable for $.01 per warrant at any
time. If redeemed when no current prospectus is in effect, you will not have the
opportunity to exercise the warrants. In this case, you will have to accept the
nominal redemption price.
You will suffer substantial dilution in the purchase price of your stock
compared to the net tangible book value per share immediately after the
purchase. The exact amount of dilution will depend on the number of warrants
exercised. The fewer warrants exercised, the greater the dilution will be on the
warrants that are exercised. See "Dilution."
Our articles of incorporation and bylaws limit the liability of officers
and directors, and require indemnification. This will limit your ability as a
shareholder to hold our officers and directors liable and to collect monetary
damages for breaches of fiduciary duty. It also requires us to indemnify our
officers and directors to the full extent permitted by law. Our officers and
directors have no personal liability if they breach their fiduciary duties.
However, they may have personal liability for breaches of their duty of loyalty.
They may also have personal liability for acts or omissions not in good faith or
which involve intentional misconduct or knowing violation of law; unlawful
payment of dividends or unlawful stock purchases or redemptions; or any
transaction from which they derive an improper personal benefit. See "Certain
Transactions -- Indemnification and Limitation of Liability of Management".
To the extent they are authorized, our directors can issue additional
common and/or preferred stock without further shareholder approval. If we issue
additional common stock in the future, it will reduce the proportionate
ownership and voting power of your common stock. Designation and issuance of
preferred stock in the future will create additional securities with dividend
and liquidation preferences over common stock. We are authorized to issue
50,000,000 shares of common stock and 5,000,000 shares of preferred stock. Our
board may designate the rights and preferences of the preferred stock we issue.
Our board has not designated any series or issued any shares of preferred stock.
10,183,948 shares of common stock are issued and outstanding. See "Description
of Securities."
Our directors may, without stockholder approval, issue additional shares of
common stock and/or preferred stock to use as an anti-takeover measure. This
could prevent, discourage or delay a takeover attempt and result in you
receiving less for your stock than you otherwise might. See "Description of
Securities."
If you are exercising warrants, you are not assured that you will be able
to sell your common stock in the future at a price that equals or exceeds your
exercise price. We arbitrarily determined the exercise price of the warrants and
set them at a level substantially in excess of prices recently paid our common
stock. The price we set bears no relationship to our assets, book value, net
worth or other economic or recognized criteria of value. In no event should you
regard the exercise price as an indicator of any future market price of our
securities.
8
<PAGE> 10
An active trading market in our stock may not develop and if it does, it
may not continue. Although our common stock is eligible for quotation on the
NASD Electronic Bulletin Board, there has been no active public trading market
for our shares. As a result, an investment in our common stock may be totally
illiquid and you may not be able to liquidate your investment readily or at all
when you need or desire to sell.
Sales of substantial amounts of our common stock in the public market could
adversely affect our market price. Approximately 2,000,000 of the 10,831,948
shares of our common stock presently outstanding are freely tradable. About
8,000,000 of the remaining shares are eligible for public resale under Rule 144
of the Securities Act of 1933. See "Shares Eligible for Future Sale".
The SEC considers our common stock a low priced security. Under SEC rules,
broker-dealers participating in transactions in low-priced securities must give
customers a risk disclosure document that describes risks associated with low
priced stocks. The disclosure document describe the broker-dealers' duties,
customers' rights and remedies, market and other information; the broker-dealer
must make suitability determinations approving customers for these stock
transactions based on financial situation, investment experience and objectives.
Broker-dealers must also disclose these restrictions in writing, provide monthly
account statements to customers, and obtain the specific written consent of each
customer. With these restrictions, the likely effect of designation as a low
priced stock is to decrease the willingness of broker-dealers to make a market
for the stock, to decrease the liquidity of the stock and increase the
transaction cost of sales and purchases of these stocks compared to other
securities.
DILUTION
Dilution is the difference between the warrant exercise prices of $6.00 per
share for Series A warrants, or $7.00 per share for Series B warrants, and the
net tangible book value per share of the common stock immediately after its
purchase. Net tangible book value per share is calculated by subtracting total
liabilities from total assets less any intangible assets, and then dividing by
the number of shares then outstanding. Based on our consolidated financial
statements at June 30, 1999, our net tangible book value ("NTBV") was
approximately $(2,043,000) or approximately $(0.19) per common share. Prior to
the exercise of any warrants, we have 10,831,948 shares of common stock
outstanding.
If all Series A warrants are exercised (which is not assured), upon their
exercise, but prior to exercise of any Series B warrants or other outstanding
options or stock rights, we would have 11,941,948 shares of common stock
outstanding. Our estimated pro forma net tangible book value (which gives effect
to receipt of the estimated net proceeds from such exercise and issuance of the
underlying shares of common stock, but does not take into consideration any
other changes in our net tangible book value subsequent to June 30, 1999), would
then be $4,617,000 or approximately $0.39 per share. This would result in
dilution to persons exercising Series A warrants of $5.61 per share, or 93.5% of
the exercise price of $6.00 per share. Net tangible book value per share would
increase to the benefit of present stockholders from $(0.19) prior to the
offering to $0.39 after the offering, or an increase of $0.58 per share
attributable to the exercise of the Series A warrants. If, in addition, all
Series B warrants are exercised, we would have 13,051,948 shares of common stock
outstanding (assuming no other changes). Our pro forma net tangible book value
would then be $12,387,000 or approximately $0.95 per share. This
9
<PAGE> 11
would result in dilution to persons exercising Series B warrants of $6.05 per
share, or 86.4% from the exercise price of $7.00 per share. Net tangible book
value per share would increase from $(0.19) prior to the exercise of Series B
warrants to $0.95 afterwards, or an increase of $1.14 per share attributable to
the exercise of the Series B warrants.
The following table sets forth the estimated net tangible book value per
share after exercise of each series of the warrants and the dilution to persons
purchasing the underlying shares of common stock.
<TABLE>
<CAPTION>
SERIES A AND
EXERCISE OF ALL WARRANTS OF: SERIES A ONLY SERIES B
---------------------------- ------------- ------------
<S> <C> <C>
Warrant exercise price/share......................... $ 6.00 $ 7.00
NTBV/share prior to exercise......................... (0.19) (0.19)
Increase attributable to Warrant exercise............ 0.58 1.14
Pro forma NTBV/share after exercise.................. 0.39 0.95
Dilution............................................. $ 5.61 $ 6.05
</TABLE>
If less than all the warrants of either series are exercised, dilution to
the exercising warrant holders of each series will be greater than the amount
shown. The fewer warrants exercised, the greater dilution will be.
10
<PAGE> 12
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FOR THE FISCAL YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.......................... $27,402 $52,254 $88,510 $79,622 $88,894 $34,923 $70,797
Gross profit.......................... 3,285 5,654 7,475 7,157 8,757 3,231 8,213
Income (loss) from operations......... 437 980 (139) 580 (2,568) (754) (85)
Net income (loss)..................... 234 391 (444) 62 (3,190) (1,480) (463)
Net income (loss) per common share.... $ 0.03 $ 0.06 $ (0.07) $ 0.01 $ (0.38) $ (0.22) $ (0.04)
Shares used to compute basic and
diluted net income (loss) per
share............................... 6,772 6,772 6,772 6,772 8,491 6,856 10,669
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 608 $ 1,678 $ 2,037 $ 383 $ 818 $ 413 $ 421
Working capital....................... 236 981 (81) (1,148) (3,702) 1,138 (3,391)
Total assets.......................... 5,681 17,638 25,709 16,301 27,729 21,792 40,729
Total liabilities and minority
interest............................ 5,039 16,641 25,127 16,653 27,510 19,758 38,350
Total stockholder's equity............ $ 642 $ 997 $ 582 $ (352) $ 219 $ 2,034 $ 2,379
</TABLE>
11
<PAGE> 13
USE OF PROCEEDS
The net proceeds to us from sale of the shares of common stock underlying
the warrants at the exercise prices of $6.00 per share for Series A warrants and
$7.00 per share for Series B warrants will vary depending upon the total number
of warrants exercised. If all warrants were to be exercised (of which there is
no assurance, nor any assurance that any warrants will be exercised), we would
receive gross proceeds of $6,660,000 from Series A warrants and $7,770,000 from
Series B warrants, or aggregate gross proceeds of as much as $14,430,000.
Regardless of the number of warrants exercised, we expect to incur offering
expenses estimated at $125,000 for legal, accounting, printing and other costs
in connection with the offering. Inasmuch as there is no assurance all warrants
will be exercised nor any requirement that any minimum amount of the warrants be
exercised, there are no escrow provisions and any proceeds that are received
will be immediately available to us to provide additional working capital to be
used for general corporate purposes. As we do not know if any of the warrants
will be exercised, we are unable to develop a formal business plan on the
disposition of any proceeds we might receive from the sale of the common stock
underlying the warrants. However, our executive management team expects to
recommend to our board that any proceeds we do receive be allocated
approximately in the following order and amount:
- Acquisitions in the U.S. of companies with a geographical diversity
and/or a services component--$5 million;
- uMember capital expenditures and general corporate needs--$3 million;
- European acquisitions and/or operations--$3 million;
- General corporate needs--upgrade systems, employee training, meet
working capital deficits, etc.--$3 million.
However, we must caution you that we may not raise sufficient funds to meet
the above objectives. We also may not have the listed opportunities available to
us. Based on opportunities that may be available to us and the amount of
proceeds, if any, we receive, our management and/or board may revise the above
list. We must also caution you that while we have identified several possible
acquisition candidates in the U.S. and Europe, we do not know the likelihood of
any deal occurring.
MARKET INFORMATION & DIVIDEND POLICY
MARKET INFORMATION
Our common stock has traded in the over-the-counter market on a limited and
sporadic basis, and is quoted on the National Association of Securities Dealers,
Inc. Electronic Bulletin Board under the symbol WFRC. The following table sets
forth the high and low bid price quotations for each calendar quarter since we
began trading in July 1998. We forward split our common stock on a 1.85 for 1
basis in July 1998. Quotations for periods prior to such split have been
restated to reflect post split amounts throughout.
12
<PAGE> 14
<TABLE>
<CAPTION>
QUARTER ENDED HIGH BID LOW BID
------------- -------- -------
<S> <C> <C>
September 30, 1998................................. $5 5/16 $3
December 31, 1998.................................. $5 $2 5/8
March 31, 1999..................................... $9 1/2 $6 1/4
June 30, 1999...................................... $7 7/8 $3
</TABLE>
These prices represent interdealer quotations, without retail markup,
markdown or commissions, and may not represent actual transactions. As of June
30, 1999, there were approximately 58 holders of our common stock listed on our
records. Some of these holders are brokerage firms that hold our stock in street
names for their investors. We do not know how many of these investors are
represented by these street names.
DIVIDEND POLICY
We have not previously paid any cash dividends on common stock and do not
anticipate or contemplate paying dividends on common stock in the foreseeable
future. It is our present intention to utilize all available funds for the
development of our business. Under Nevada corporate law, we may not pay any
dividends or other distributions which would render us insolvent or reduce our
assets to less than the sum of our liabilities plus the amount needed to satisfy
outstanding liquidation preferences. Also, our loan agreement with Congress
Financial Corp. prohibits us from paying dividends without their approval.
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<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the consolidated
financial statements and notes included in this prospectus.
The financial statements referred to reflect the financial condition and
operating results of Wareforce.com, Inc. (formerly known as Jolley Vending)
since its acquisition of Wareforce Incorporated in July, 1998, through the year
ended December 31, 1998, and of Wareforce Incorporated for periods prior to the
acquisition. This discussion should not be construed to imply that the results
discussed will necessarily continue into the future or that any conclusion
reached will indicate our actual operating results in the future. This
discussion represents only the best present assessment of our management.
GENERAL
Wareforce Incorporated was formed in 1985 and historically has sold
computer products that held in inventory by distributors, aggregators and
manufacturers of computers and computer products. We generally do not keep
significant amounts of inventory. Our industry faces considerable pricing
pressures. Given these pressures, we plan to continue to focus our sales efforts
on Fortune 1000 companies and other large organizations. We believe these
organizations offer growth opportunities for us to both vertically and
horizontally sell and market computer products and services. During 1998, we
began to implement both our electronic commerce and technical services
acquisition strategies.
During 1998 we launched our electronic commerce web site. This site enables
customers' fast, efficient and cost-effective electronic procurement of
technology products and services while streamlining our internal operations and
cost structure by reducing the need for customer service representatives as we
will need less people to take orders by phone and fax. To date, we have found
that our customers use our web site for checking the status of their orders and
for obtaining information about us rather than ordering products from us. To
date, no revenues are generated directly from our web site. However, as
customers such as the County of Los Angeles and California State University at
Fullerton come on-line with us, we expect to begin generating revenues from our
web site. We have not historically kept statistics on such things as number of
average page views, unique visitors to our web sites and the length of time
spent on our sites. However, during June and July 1999 we averaged 5500 hits to
our sites. In June 1999 we had 350 hits to our on-line customer service center,
the secure portion of our web site where customers can do such things as check
the status of their orders. We have 84 users registered to use this secure
portion of our site. We are unable to determine whether these registered users
are individuals, represent entire organizations, or both. In early 1999, we
increased our web presence and electronic offerings by acquiring 70% of
uMember.com. uMember's web site is not yet operational. It does not yet have any
registered users.
As part of our technical services acquisition strategy, in September 1998,
we completed the acquisition of CY. The acquisition of this technical
services/computer products firm doubled the size of our core business. In March
1999, we completed the purchase of Kennsco, which is primarily a technical
services firm. Kennsco generated $16.18 million in revenues in its 1998 fiscal
year from operations in the Midwest and Florida.
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<PAGE> 16
Acquiring new companies and moving into technical services and selling
through electronic commerce represented new expanded undertakings for us. This
expansion used a significant amount of resources in the past year and required a
great deal of our management time. We expect future expansion to also utilize a
significant amount of our financial and management resources. These undertakings
cannot be supported with internally generated financing and will require
additional outside funding. We expect to obtain these outside funds from this
offering. However we do not know if we will raise any money from this offering.
If we do not, and cannot find other outside sources of funds, we cannot assure
you that we will be able to continue future funding of these ventures.
In fiscal 1998, sales to the County of Los Angeles accounted for
approximately 11% of our total sales and sales to the State of Florida accounted
for approximately 22% in 1998. Based on history, we expect to continue to make a
significant portion of our sales to one or more large customers. Our management
believes that our horizontal and vertical strategy of expanding service
offerings may yield higher margins from our large customers than product sales
alone yield. However, our sales to high volume customers have historically been
primarily product sales. Therefore, any significant increase in product sales to
high volume customers may increase our overall net sales and/or our
profitability but may also reduce our overall gross profit margins.
Typically, we do not place an order with a supplier until we have received
an order from a customer. Inventory is then drop-shipped by the supplier to
either the customer or our distribution center located in Manhattan Beach,
California. The supplier typically ships products within one to two days.
Consequently, almost all of our revenues in a quarter result from orders
received in that quarter. Although we do not maintain significant inventory, we
record as inventory merchandise being configured as well as merchandise
purchased from suppliers but not yet shipped to customers. As a result, we
generally reflect ten to twelve days' cost of sales as inventory.
We finance the purchase of computer products to fill sales orders through a
line of credit which is collateralized by accounts receivable and inventory.
Because the amount of credit available to us is dependent upon our accounts
receivable and inventory balances, any delay in collection or deterioration of
the quality of accounts receivable could adversely affect our ability to obtain
necessary credit, as could economic trends in the computer industry, interest
rate fluctuations and the lending policies of our lenders, resulting in a
material adverse effect on our financial position and results of operations.
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<PAGE> 17
RESULTS OF OPERATIONS
The following table shows our operating results as a percentage of net
sales:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- -------------
1994 1995 1996 1997 1998 1998 1999
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Consolidated Net Sales........... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold............... 88.0 89.2 91.6 91.0 90.1 90.7 88.4
Gross Profit..................... 12.0 10.8 8.4 9.0 9.9 9.3 11.6
Selling, General & Administrative
Expenses....................... 10.4 8.9 8.6 8.3 12.7 11.4 11.7
Income (Loss) from Operations.... 1.6 1.9 (0.2) 0.7 (2.9) (2.1) (0.1)
Interest Expense................. 0.3 0.7 0.6 0.6 0.6 0.7 0.4
Other (Income) Expense........... (0.1) (0.1) (0.1) 0.0 0.9 2.4 0.1
Income (Loss) Before Taxes....... 1.4 1.2 (0.7) 0.1 (4.4) (5.2) (0.6)
Benefit (Provision) for Income
Taxes.......................... (0.5) (0.5) 0.2 (0.0) 0.9 1.0 0.0
Net Income (Loss)................ 0.9% 0.7% (0.5)% 0.1% (3.5)% (4.2)% (0.6)%
</TABLE>
INTERIM PERIOD
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998.
Revenue
Our revenues increased 102.9% to $70.8 for the six months ended June 30,
1999 from $34.9 million for the six months ended June 30, 1998, a $35.9 million
increase. The increase is primarily attributable to the acquisitions of CY in
September 1998 and Kennsco in March 1999. CY and Kennsco accounted for $30.2 and
$4.2 million of revenues in the six months ended June 1999 respectively. The
remaining $1.5 million increase came from the Wareforce business which grew only
slightly.
Gross Profit
Total gross profit was 11.6% of revenues or $8.2 million for the six months
of 1999, compared to 9.3% or $3.2 million for the same period in 1998, a $5.0
million increase. In dollar terms, the total gross profit increase from the CY
acquisition was $2.7 million, $1.4 million from the Kennsco acquisition, and $.9
million from the existing Wareforce business. The increasing percentage to 11.6%
from 9.3%, a 2.3 percentage point increase, is due to our increased focus on
technical services. By including technical services with the computer system
sale our overall margins increased .9 percentage points for the Impres/
Wareforce business. The gross profit margins of Kennsco was 33.3% on $4.2
million of revenues contributing a 1.4 percentage point increase to the overall
consolidated margin.
Operating Expenses
SG&A was 11.7% of net sales or $8.3 million for the six months ended June
30, 1999, compared to 11.4% or $4.0 million for the same period in 1998.
In absolute terms the increase to $8.3 from $4.0 million, a $4.3 million
increase was primarily due to the acquisitions mentioned above. CY contributed
$2.9 million, Kennsco contributed $1.3 million and our ecommerce startup,
uMember, contributed $100,000 for
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<PAGE> 18
the six months ended June 1999. These expenses at CY and Kennsco will be ongoing
in the future. They are necessary to support the sales offices and additional
revenues that the acquisitions contribute. uMember expenses will grow
significantly as that subsidiary continues the development of its web site and
implements its business strategy. As a percentage of revenue, SG&A increased
slightly to 11.7% from 11.4%, a 0.3% point increase. The uMember expenses
contributed 0.2% points of the 0.3% increase.
Interest Expense
Interest Expense increased $83,000 or 35.6% for the six months ended June
30, 1999 from $233,000 to $316,000. Although sales increased 102.9%, interest
expense increased at a considerably smaller rate. Through the refinancing of our
credit line with a more favorable interest rate in August 1998, a reduction in
the prime rate and better cash flow management, we were able to minimize the
rate of increase in interest expense when compared to the rate of increase in
our sales.
FISCAL YEARS
TWELVE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1997.
Revenue. Our revenues increased 11.7% from $79.6 million for the twelve
months ended December 31, 1997 to $88.9 million in the twelve months ended
December 31, 1998. This increase was largely attributable to the acquisition of
CY. Without CY, Wareforce revenues would have decreased by $10.8 million from
$79.6 million to $68.8 million due to the expiration of a contract with a major
customer, which represented 24.5 percent of total revenues in 1997 and 4.4
percent in 1998.
Gross Profit. Total gross profit was 9.9% of revenues, or $8.8 million, for
1998, compared to $7.2 million, or 9.0%, of revenues in 1997. The gross profit
increase of $1.6 million is due to the following: The acquisition of CY
contributed $2.2 million to the increase; the decline in sales, primarily due to
a loss of a major customer for Wareforce, contributed $(1.2) million decrease
offset by a $600,000 increase contribution of a full year of the Apple contract.
We act as a sales agent for Apple Computer and are paid a commission based on
Apple's sales in the five-state territory. This sales agent program began in May
1997. The contract with Apple runs through December 31 of each year and is
renewable at Apple's discretion. The gross profit as percent of net revenues
increased to 9.9% from 9.0%. This is due in part to the increasing percentage of
our net sales from higher margin technical services. These services often
command gross profit margins of 25% to 40%, depending on the type of services
performed.
Operating Expenses. SG&A expenditures increased to $11.3 million or 12.7%
of sales in 1998 from $6.6 million or 8.3% of net sales in 1997, an increase of
$4.7 million. The majority of this increase, $2.7 million or 57%, is due to the
acquisition and integration of CY as of September 1998. CY operates three sales
offices. Subsequent to the acquisition the on going cost of these offices plus
the administrative expenses to support these offices is expected to be
approximately $580,000 per month or $2.3 million for a four month period. This
is a savings of $100,000 per month compared to the four month cost of $2.7
million in 1998. The remaining $2.0 million increase is due to the following:
$800,000 in expenses were associated with the development of our structure to
support acquisitions and operate as a public company; $500,000 for the opening
of two sales offices on the East Coast of which $400,000 was compensation;
$300,000 for the hiring of six salesmen for
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<PAGE> 19
selling to state and local governments; another $300,000 for increasing our
technical services capabilities and $100,000 for building ecommerce
capabilities.
Other expenses increased to $842,000 in 1998 from $7,000 in 1997 primarily
due to one-time expenses associated with the raising of $6.0 million in
financing for 1998.
Net interest expense increased to $551,000 in 1998 from $491,000 in 1997, a
$60,000, or 12%, increase. This increase was in keeping with a 12% increase in
sales. The majority of interest expense was due to borrowing against our credit
line used to purchase inventory.
FISCAL YEARS
TWELVE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1996.
Revenue. Wareforce Incorporated revenues decreased $8.9 million or 10.1%
from $88.5 million for the twelve months ended December 31, 1996 to $ 79.6
million in the twelve months ended December 31, 1997. This decrease is due to
the fact that while Los Angeles Micromart, Inc. d/b/a Personal Support Computers
(PSC) contributed $10.1 million to Wareforce Incorporated sales in 1996, it had
no sales from PSC in 1997. PSC, an Apple Computer retail dealership, was
purchased by Wareforce Incorporated in August 1995 and was sold by Wareforce
Incorporated in November 1996. Without the operations of PSC, sales for
Wareforce Incorporated grew from $78.4 million for the twelve months ended
December 31, 1996 to $79.6 million for the twelve months ended December 31,
1997, an increase of 1.5%. This increase was primarily attributable to increased
sales to its existing customers, including higher levels of sales attributable
to software licenses.
Gross Profit. Wareforce Incorporated's gross profit from sales decreased
4.3% from $7.5 million for the twelve months ended December 31, 1996 to $7.2
million in the twelve months ended December 31, 1997. However, its gross profit
from PSC sales contributed $1.7 million for the twelve months ended December 31,
1996 at a gross profit percentage of 16.6%, prior to the reserves described
below. Although the gross profit percentage was higher at PSC than those from
Wareforce Incorporated's traditional corporate sales, PSC had higher SG&A
expenses than Wareforce Incorporated's core corporate sales business. Therefore,
it contributed a smaller percentage of operating profit than did corporate
sales. Without PSC, Wareforce Incorporated's gross profit increased for the
twelve months ended December 31, 1997 by 22.0% to $7.2 million for the period.
This increase came about as it took advantage of opportunities to increase sales
and increase margins through the sale of a broader range of products and
value-added services such as asset management, help desk services and LAN/WAN
design.
As part of the accounting for the PSC asset sale its discontinuation of
business, Wareforce Incorporated set up a reserve of $0.3 million. This was
comprised primarily of discounts given on the sale of PSC's inventory, plus
other costs associated with the asset sale and business discontinuation. This
reserve reduced Wareforce Incorporated's overall gross profit margin to 8.4% for
the period ended December 31, 1996.
Operating Expenses. Wareforce Incorporated's SG&A attributable to sales
decreased 4.9% from $6.9 million in the twelve months ended December 31, 1996 to
$6.6 million in the twelve months ended December 31, 1997. As a percentage of
sales, SG&A was 8.6%, which includes 0.8% of non-recurring expenses, in 1996 and
8.3% in 1997. SG&A for PSC was $1.9 million for the twelve months ended December
31, 1996. As discussed above, the
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<PAGE> 20
operations of PSC were discontinued in November 1996. Without PSC, SG&A
increased from $5.0 million, or 6.4% of revenue for the twelve months ended
December 31, 1996 to $6.6 million, or 8.3% of revenue for the period ended
December 31, 1997. In 1997, Wareforce Incorporated significantly increased
expenditures for new sales and new technical service personnel and added a
significant number of personnel to support its sales agent contract with Apple.
Interest expense decreased from $544,000 for the twelve months ended
December 31, 1996 to $491,000 for the twelve months ended December 31, 1997. The
lower interest expense in 1997 is due primarily to decreased borrowings as
Wareforce Incorporated paid off a term loan it used to purchase PSC.
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.
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 in late
August 1998. This line replaced a $15 million line we had with another lender.
As of December 31, 1998, and June 30, 1999 we had a working capital deficit
of $(3.7) million and $(3.4) 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 June 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 $9.4 million for
the six-month period ended June 30, 1999. This resulted from a net loss of
$500,000 for the period with an increase in accounts receivable and inventory of
$5.7 million and $1.4 million, respectively and by a decrease in accounts
payable and accrued expenses of $1.7 million. Net cash used for operations for
the year ended December 31, 1998 was $1.7 million. This was primarily due a net
loss of $3.2 million, which was offset by a decrease in other receivables and
inventory and an increase in accounts payable.
Net cash flows used in investing activities for the six-month period ended
June 30, 1999 was $1.4 million. Investing activity for this period included
$750,000 used for the purchase of the assets of Kennsco and approximately
$600,000 for the purchases 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 twelve-month period ended December 31, 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
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<PAGE> 21
equipment for internal use. See "The Company -- Kennsco Acquisition" and "The
Company -- uMember.com Acquisition".
Net cash flows provided by financing activities for the six-month period
ended June 30, 1999 was $10.3 million. The sources of this financing activity
were our $2.2 million equity placement plus an increase of $8.1 million in our
outstanding line of credit offset by a reduction in our long term debt. Net cash
flows provided by financing activities for the twelve-month period ended
December 31, 1998 was $5.7 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. See note 11 to the 1998 Financial
Statements, "The Company -- Background" and "Related Transactions".
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 (7.75% as of June 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 $5 million. As of June 30, 1999, our
adjusted net worth was greater than $5 million. Also, our loans to Mr. Rechtman
cannot total more than $3.8 million. As of June 30, 1999, these loans were less
than $3.8 million. As of June 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. Total outstanding borrowings under the
revolving line of credit were $12.3 million as of June 30, 1999.
The line of credit includes inventory financing through NationsCredit
Distribution Finance, Inc. Advances under this flooring plan at June 30, 1999
were $7.8 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, "The
Company -- Background", "The Company -- CY Acquisition" and "Related
Transactions".
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
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<PAGE> 22
complete our asset purchase of Kennsco, funding start-up costs for uMember.com
and general working capital purposes. See "The Company -- Kennsco Acquisition".
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
(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, Kennesco, 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
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<PAGE> 23
readiness. 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
We are finalizing our contingency plans to minimize the above risks
associated with non-Y2K readiness as follows:
- identifying alternate suppliers that are Y2K compliant;
- closely monitoring all accounts receivable, accounts payable, and bank
statements; and
- preparing to supply needed proof of delivery or duplicate copies of
invoices for customers.
Completion of these plans is targeted for October 31, 1999.
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.
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THE COMPANY
OUR HISTORY AND DEVELOPMENT
Wareforce.com, Inc., a Nevada corporation, is currently engaged in the
business of providing information technology services. We were originally
incorporated under the laws of the State of Nevada on June 27, 1995, under the
name of Jolley Vending, Inc., to engage in the vending machine business. Jolley
completed a public offering on January 21, 1997 under rule 504 of Regulation D..
In July 1998, we discontinued operations with respect to the vending
machine business and then entered into an agreement and plan of reorganization
with Wareforce Incorporated pursuant to which we forward-split our common stock
on a 1.85 for 1 basis, and then issued 9,025,000 post-split shares of our
authorized but previously unissued common stock to acquire all the issued and
outstanding stock of Wareforce in a stock for stock exchange. As part of the
acquisition, we changed our name to Wareforce One, Inc. (which was subsequently
changed to Wareforce.com, Inc. in January 1999) and declared a distribution of
Series A and B Warrants, to be made as soon as practicable after the effective
date of the registration statement of which this prospectus is part, to our
common stockholders of record as of July 13, 1998, immediately prior to the
acquisition. If all such warrants get exercised, of which there is no assurance,
we would raise an additional $14,430,000 of capital.
OUR BACKGROUND AND BUSINESS
Wareforce Incorporated was originally incorporated in 1985 as a company to
sell technology products, based in El Segundo, California, a suburb of Los
Angeles. Mr. Rechtman and his then-wife Anita Gabriel assumed control of
Wareforce Incorporated in 1990, with Mr. Rechtman serving as President and Ms.
Gabriel as CEO. At that time, Wareforce Incorporated management set a goal of
becoming a complete IT solution provider by adding valuable certifications from
leading hardware and peripherals manufacturers. Management also sought to
develop a comprehensive IT services and support division. Revenues have grown at
a compound annualized rate of 60%. Net revenues increased from $2 million in
1990 to $88.9 million in 1998 through both internal growth and, more recently,
through acquisitions. From its founding in 1985 until its acquisition by Jolley
in August 1998, Wareforce Incorporated was a privately held corporation and
operated under the name of Wareforce Incorporated. Ms. Gabriel resigned all her
positions with Wareforce Incorporated in February 1998 upon her sale of her
shares in Wareforce Incorporated to Mr. Rechtman. See "Management" and "Related
Transactions".
On January 12, 1999, our board of directors approved the changing of our
name from Wareforce One, Inc., to Wareforce.com, Inc. The move reflected our
strategy to enhance our electronic commerce offerings by selling IT products via
our web site as well as through traditional channels such as direct sales and
over the telephone. We believe that our integrated electronic commerce offerings
are fast and efficient and may reduce our customers' procurement costs. Our
current Internet-based virtual computer products' warehouse represents 140,000
different products from over 900 industry-leading vendors. We expect to attract
new customers to our electronic commerce procurement site as well as lower the
costs of servicing existing clients by automating much of the purchase, status
and invoicing processes.
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As a result of our September 1998 acquisition of CY and our March 1999
purchase of the assets of Kennsco, we currently have a sales presence in 31 U.S.
cities and employ approximately 290 people. Wareforce.com would have had pro
forma consolidated revenues of approximately $150 million in fiscal 1998 had the
CY and Kennsco acquisitions been made on January 1, 1998.
GROWTH STRATEGY
We intend to pursue additional acquisitions of IT services businesses and
electronic commerce companies. We expect this to broaden our service offerings;
add technical and sales personnel; increase our presence in existing markets;
expand our reach into new geographic markets in the U.S. and Europe; improve our
operating efficiencies through economies of scale; and cement strategic vendor
and customer relationships. We cannot however, guarantee that we can find
suitable acquisition candidates or that, if we do, we can acquire them on
favorable terms.
CY ACQUISITION
As part of management's strategy to aggressively grow technical services
and increase its local market share in Southern California, we completed the
strategic acquisition of CY in September of 1998. CY is a technical service and
computer sales firm based in Los Angeles that generated revenues of
approximately $64.5 million for the twelve months ended December 31, 1998. This
marks a 14.5% growth rate from 1997 when their sales volume reached $56.3
million. CY brought us a large, complimentary customer base, an enhanced
presence in the government and corporate market segments, expanded technical
service offerings, and experienced sales, technical and professional staff. CY
customers include: Los Angeles County, Universal Studios and Arco. CY was
operationally integrated into Wareforce.com in January 1999. The integration
resulted in the elimination of approximately 40 redundant staffing positions. In
a move to simplify its operational structure and take advantage of a single
brand name, we plan to formally dissolve CY into Wareforce in the third or
fourth quarter of 1999.
UMEMBER.COM ACQUISITION
In early 1999, we acquired 70% of the common stock of uMember.com, a
membership-based electronic shopping and auction Internet destination web site.
The terms of our acquisition required us to issue 30,000 restricted shares of
our common stock to the four founders of uMember.com as well require us to fund
up to $1.0 million of uMember.com's initial operations and development costs. We
are currently attempting to raise this $1.0 million. We cannot assure you that
we will be able to do. If we cannot, the operations of umember.com will be
materially, adversely affected. Umember.com expects to complete development of
its site in the fourth quarter of 1999. We believe that the concept of
uMember.com is unique to the on-line sales and auction sites currently operating
on the Internet today as it plans to draw its customers from the employees of
Wareforce.com's existing corporate, government and education customers rather
than competing for customers through traditional mass advertising.Wareforce.com
will continue to service its clients at the corporate level, while the
uMember.com Internet destination is intended to tap into sales to the employees
of Wareforce.com's existing customer base, an as-yet untapped source of revenue.
We believe that many of our customers, some of whom employ 10,000 or more
employees, would take advantage of the ability to offer uMember.com membership
as a cost-free benefit to their employees. All of our existing
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accounts, including such large accounts as Northrop Grumman Corp., NASA, TRW
Inc., the University of California school system, The Walt Disney Co., Universal
Studios, Inc., the National Association of Counties, the governments of the
State of Florida and the County of Los Angeles are potential participants in
this unique marketing strategy. Membership will also be offered to groups and
associations (such as the National Credit Union Association) that are registered
directly by uMember.com's sales force. By leveraging Wareforce.com's existing
customer base alone, an estimated 3-5 million employees may be eligible to join
the uMember.com Internet sales and auction network.
uMember.com expects its members to benefit from volume discounts negotiated
with manufacturers and service providers. It expects to offer consumer products
and services for sale and auction ranging from computers, consumer electronics
and jewelry to travel and personal financial services. uMember.com expects
prices to be competitive with those of uBid.com, Onsale.com and other online
suppliers. We expect revenues from the uMember.com venture to be generated
through advertising, marketing development funds provided by product vendors,
transaction fees and online sales.
uMember.com plans to make an initial public offering in 2000. Our board has
also discussed the possibility of distributing all or a portion of the shares we
hold in uMember.com to our shareholders in a tax-free distribution at some point
either immediately before or after such an initial public offering. However,
uMember.com has not yet entered into any negotiations with any underwriters for
such a public offering and there is no guarantee that one will occur, or should
one occur, that it will be successful. Also, our board has not yet made a final
determination of such as to such a share distribution nor has our independent
auditors advised us on the tax and accounting consequences of such a
distribution, should one occur.
KENNSCO ACQUISITION
In March 1999, we completed the asset purchase and assumption of
liabilities of Kennsco, a technical services company with revenues of
approximately $18 million in 1998. The purchase consisted of a combination of
$750,000 in cash, a $250,000 note payable in common stock and the assumption of
approximately $4,421,000 in liabilities. The assets purchased included current
assets, fixed assets and other assets. Liabilities assumed included a line of
credit and other liabilities. Kennsco, based in Minneapolis, Minnesota, held
technical service contracts in Florida, Minnesota, Illinois and seven other
Midwestern states and employed approximately 90 professionals company-wide. The
technical services we acquired from Kennsco include on-site maintenance for
desktop and midrange computer equipment; depot repair; and network design,
installation and maintenance. Virtually all Kennsco contracts have been assigned
to, or assumed by, us. We also hired virtually all of Kennsco's employees. The
acquisition greatly expands our sales and service offerings in Florida, where we
hold an exclusive Microsoft Select product contract for government and higher
education users. It also strengthens our Midwestern presence as a technical
service provider and enhances our ability to provide nationwide technical
services and support to our customers' field offices throughout the U.S. The
transaction also gives us ownership of Kennsco's Leasing Division, which expands
our ability to lease computer equipment directly to end-users. Kennsco currently
operates as a division of Wareforce under the name Kennsco Technical Services.
In an effort to simplify its operations and take advantage of a single brand
name, we plan to discontinue the use of the Kennsco trade name in late 1999.
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OTHER
We have verbally agreed to a joint venture agreement as part of two-step
process to acquire privately held CampaNova GmbH of Frankfurt, Germany.
CampaNova provides business-to-business and business-to-consumer E-commerce
solutions to the German market. As CampaNova's operations are relatively new, we
expect to primarily acquire from them German market knowledge and technical
know-how rather than significant hard assets. We expect the purchase of
CampaNova to take place in late 1999. The purchase price is to be determined,
subject to due diligence. We expect any purchase price to be paid in cash and
stock. Any cash portion would require us to raise additional funds. We cannot
guarantee however that this acquisition will occur or that the joint venture or
acquisition will be successful or, if it is not, that it will not materially
impact our financial condition. We also, from time to time, are in discussions
with various other entities concerning joint ventures and acquisitions. We
cannot guarantee that any of these will come to fruition or that if they do,
that they will be successful.
CUSTOMERS
In fiscal 1998, we had a customer base of about 1,000 active customers. Our
largest 130 customers represented 95% of our total 1998 consolidated revenues.
Of these, 88 of them, or 68%, were repeat customers. For the first six months of
fiscal year 1999, 101 customers represented about 95% of our revenues. Of these
customers, 89 customers, or 88%, were repeat customers from 1998. They generated
approximately 95% of our revenues for the first six months of 1999. Many clients
have been active customers for three or more years. A sample list of customers
include: SBC Communications Inc. (Pacific Bell), Universal Studios, Inc., LA
Cellular, Arco, The Boeing Company, the State of California, the State of
Florida, Los Angeles County and the University of California University school
system.
Two customers, the State of Florida and Los Angeles County each represented
greater than 10% of our net revenues during fiscal 1998 and during the first six
months of 1999. During fiscal year 1998, sales to the State of Florida totaled
approximately $19.6 million or approximately 22% of net revenues for the period.
During the first six months of 1999, sales to the State of Florida totaled
approximately $11.2 million or approximately 17% of total revenues. Sales to the
State of Florida decreased as a percentage of total revenues from 1998 compared
to the first six months of 1999 due to the recognition of revenues related to
the CY acquisition which caused overall sales volumes to increase. During fiscal
year 1998, sales to Los Angeles County totaled approximately $9.8 million or
approximately 11%. During the first six months of 1999, sales to Los Angeles
County totaled approximately $16.5 million, or approximately 25% of net
revenues. Sales to LA County increased from 1998 to the first six months of 1999
largely due to the fact that only four months of CY sales to Los Angeles County
were realized by Wareforce from September 1998 through December 1998.
No other customers comprised greater than 10% of net revenues during fiscal
1998 and the first six months of 1999. Many of these customers have numerous
departments, divisions and end users. They are usually authorized to make
independent purchase decisions and to establish discrete, billable accounts. For
example, Wareforce.com serves over 50 different operating departments within Los
Angeles County alone. In certain instances, Wareforce.com has exclusive or
limited competition sales contracts with customers that generally cover the
procurement of products and services over a one-to-
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three year period and may contain one or more one-year renewals. These contracts
are subject to the customers' rights to terminate the contract upon notice.
Payment terms with substantially all of our customers are net 30 days. Although
customer arrangements vary, we generally give customers return (for credit or,
in limited cases, refunds) and exchange privileges. These are usually limited to
20 calendar days for stock hardware and software products and defective or
damaged products.
SALES AND MARKETING
We generally sell and market to three types of customers: Corporate
(mid-size, large and Fortune 1,000); Government (State & County); and Education
(K-12 and Higher Education). To these customers, we will sell both products and
technical services. In fiscal 1998, the percentage of our revenues from each of
these types of customers was approximately 53% to Corporate customers, 34% to
Government customers and 13% to Education customers. For the first six months of
1999, the percentage of our revenues from Corporate customers was approximately
47%; from Government customers approximately 47%; and from Education customers
approximately 6%. We rarely sells to individual consumers. Our sales team
consists of inside and outside sales representatives and customer support
personnel, all of whom generate business via direct sales calls, telephone, fax,
email and via our electronic commerce web site. Sales personnel have access to
real-time pricing and availability from the two industry-leading distributors of
computer products, Ingram Micro and Tech Data via electronic links. Management
believes that it will generate additional sales while lowering operating costs
through sales via electronic commerce on its web site. Although we are highly
reliant on various automated systems, we attempt to maintain a high level of
personal interaction with customers to ensure the highest level of customer
service possible.
SUPPLIERS
We rely on manufacturers and third-party vendors, including distributors
and aggregators of computer hardware, software and peripherals to develop,
manufacture and supply all of the computer components we sell and service. We
procure computer equipment through relationships and alliances with the nation's
largest distributors of computer products, Ingram Micro Inc. Merisel Inc., and
Tech Data Corporation and with the nation's largest aggregators of computer
products, Ingram Alliance, a division of Ingram Micro, Inacom Corporation and
Pinnacor, Inc., a wholly-owned subsidiary of MicroAge, Inc. These alliances
enable us to provide customers with a wide selection of products without
subjecting us to many of the risks and costs of maintaining high levels of
inventory. As part of our integrated electronic commerce solution, we download
daily product pricing, availability and shipping data directly from Ingram
Micro/Ingram Alliance and Tech Data's online inventory databases. Updates are
provided virtually real time. Management believes that this tight integration
with vendors allows the Company to provide the quickest, most accurate
procurement services possible.
Purchases from aggregators and distributors Ingram Micro, and Tech Data
accounted for 34% and 12% respectively of our aggregate purchases for the six
months ended June 30, 1999. Certain suppliers provide us with trade credit as
well as substantial incentives in the form of discounts, rebates and cooperative
advertising. Substantially all of our contracts with our suppliers are
terminable upon 30 days' notice or less and several contain minimum volume
requirements as a condition to providing discounts to us.
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In addition to our relationships and alliances with aggregators and
distributors, we maintain standard authorization dealership agreements directly
with many leading manufacturers of computer hardware and software. Under the
terms of these agreements, we are authorized to resell to end-users and provide,
in certain cases, warranty service on the products of such manufacturers. Our
status as an authorized dealer is essential to the operation of our business. In
general, the agreements do not require minimum purchases and include termination
provisions ranging from immediate termination to termination upon 90 days prior
written notice. We generally do not purchase products directly from these
manufacturers because we believe that our distributors and aggregators provide
us with several advantages, including competitive pricing, limited inventory
risk, ready product availability, product quality assurance and access to the
various vendors which may be required on a particular project. There was no
single hardware manufacturer from whom we purchased directly more than 10% of
our total purchases in the first six months of 1999. However, we had two
hardware manufacturers, Dell Computer Corporation and Yamaha Corporation, which
accounted for approximately 7% and 3% of our purchases for the six months ended
June 30, 1999, and for which their products may only be purchased directly from
them. Additionally Wareforce purchases Microsoft product licenses directly from
Microsoft. These purchases accounted for 18% of total purchases for the six
months ended June 30, 1999.
DISTRIBUTION
Our main distribution site is located in Manhattan Beach, California. See
"The Company -- Facilities". We also have a small amount of inventory on hand in
its regional offices to serve the unique needs of the local customer base.
However, greater than 95% of our inventory is maintained at our Manhattan Beach
distribution center.
We have invested considerable sums to automate and streamline our ordering
and distribution process. When an order is entered into the system, a credit
check or credit card verification is performed, and if approved, is
electronically transmitted to the purchasing department to process. If the
requested item is on hand in inventory, the order is electronically transmitted
to the warehouse area and a packing slip is printed for order fulfillment. If
the product is not in stock, a purchase order is submitted with a vendor/
manufacturer and is either drop shipped (supplier ships directly to the
customer) or is received by our distribution facility for subsequent delivery to
the customer via UPS, FedEx or one of the our own delivery vehicles.
In general, we do not order any product unless it has received a confirmed
sales order from a customer. We currently conduct the majority of business via
direct shipment from distributor to customer. This is commonly referred to as
drop shipping. Upon request, orders may be delivered directly by our own
delivery vehicles for distances typically less than 50 miles. However, certain
customers and types of transactions require, from time to time, us to purchase a
limited amount of inventory with intention of reselling such merchandise within
30 - 60 days. Currently, most of our inventory purchases are in the areas of
Microsoft software and CD-ROM drives, the latter of which AOD, a division of CY
specializing in storage devices, sells as a specialized distributor. This
typically requires a greater reliance on a purchased inventory model. However,
in the second quarter of 1999 we decided to discontinue the operations of AOD
during the third quarter of 1999, as they are not in keeping with our core
business model. Management estimates that this will result in a loss of
approximately $5 million in revenues on an annualized basis. However, we do not
expect to record any charges for this discontinuation.
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However, further development of our web sales strategy may require an
increase in the amount of purchased inventory we currently hold and would carry
with it the risks associated with holding inventory for sale.
COMPETITION
We operate in a segment of the information technology industry that is
highly competitive. We compete primarily in the United States, specifically in
California, the mid-western states and Florida. We compete with a large number
and variety of resellers of computer hardware and software and technical service
provides. Our competition includes computer retailers, computer superstores,
consumer electronics and office supply superstores, mass merchandisers,
corporate resellers, value-added resellers, specialty retailers, distributors,
franchisers, mail order and web-based retailers and online auction companies.
Many of our competitors have significantly greater financial resources than us.
Specifically, in the technical services segment, we compete against two
basic types of companies: those that specialize in providing consulting and
technical services such as GE Information Services, a part of the General
Electric Company, Electronic Data Systems Corporation, Computer Science
Corporation, BancTec, Inc., and DecisionOne Corporation and those that provide
hardware and/or software procurement in addition to technical services and
support. Companies in the latter category include CompuCom Systems, Inc., Entex
Information Services, Inc., Inacom, Microage, and En Pointe Technologies Inc.
In the computer hardware segment, we compete not only with the large
computer resellers and technical services firms mentioned above but also with
companies that primarily specialize in the resale of computer hardware products
or have significant computer sales. Competitors in this segment include: CDW
Computer Centers, Inc., Micro Warehouse Inc., CompUSA Inc. and Office Depot,
Inc. In addition, we compete with manufacturers such as Compaq Computer, who
sell directly to end-users as well as to wholesale distributors and resellers.
We also compete with direct marketing and build-to-order computer suppliers such
Dell and Gateway 2000, Inc., both of whom sell directly to end-users, and
increasingly, directly to businesses.
Most recently, we have faced competition in the hardware segment from
online web merchants such as Buycomp.com as well as from combination
distributor-resellers of computer equipment such as TechBuyer.com and
pcOrder.com. We also face competition from online auction sites such as
Onsale.com, eBay.com and Yahoo! Auctions that sell new, refurbished and closeout
computer products, often at or below wholesale cost, in efforts to build market
share.
We do not own any intellectual property rights and therefore do not have a
competitive advantage in this area. We are authorized to service and sell a wide
range of third party software products including those from most leading
software manufacturers, including Microsoft and Novell. These products are
licensed by the customers we serve and not by us (except where we license the
products for our own internal use). We do license our primary sales and
accounting software from Cove Systems, Incorporated. The loss of our right to
use Cove's products could seriously impair our business. Our license arrangement
with Cove is informal and not in writing. We have maintained relations with Cove
for the past five years and believe our relations are good.
In the software and software licensing segment, we compete with many of
the hardware resellers mentioned above as well as organizations that specialize
in only
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software sales such as Softmart Management Services, Inc., Software Spectrum,
Inc., Softwarehouse, ASAP Software Express, Inc., and Egghead.com, Inc.. Many of
these vendors operate mail order, telemarketing and online web sites as part of
their sales and marketing strategy.
Due to the increasing commoditization of computer products, many of our
competitors compete principally on the basis of price, and may, from time to
time, sell products at or below wholesale cost in an effort to increase volume
and market share. The proliferation of manufacturers, suppliers and resellers
and highly competitive pricing has caused the prices of component parts such as
microprocessors, hard drives, and RAM to fall, thus driving retail prices lower
as well. The trend of declining prices is expected to continue in the future.
Falling prices and increasing competition have driven, and are expected to
continue to drive, average gross profit margins lower, making it more difficult
to generate the same revenue and gross profit dollars for a given level of unit
sales volume.
In addition, our industry is characterized by abrupt changes in technology,
associated inventory and product obsolescence, rapid changes in consumer
preferences, short product life cycles and evolving industry standards. We
believe that our competitive advantages include the ability to provide
competitive prices, superior product selection and quick delivery response time.
If we fail to compete favorably with respect to any of these factors, our
business, financial position, results of operations and cash flows would be
materially and adversely affected.
In response to the severe margin pressure in the computer hardware and
software segments, we and some of our competitors have aggressively focused on
expanding technical services offerings which offers value-added products and
services, higher gross margins, greater differentiation from competitors and
increased customer loyalty.
EMPLOYEES
As of June 30, 1999, we had approximately 290 employees, including
approximately 84 sales, marketing and related support personnel, 137 technical
service and support personnel, 31 purchasing and warehousing personnel and 38
employees in information systems (IS), administration and finance. We believe
that our ability to recruit and retain highly skilled sales, technical and
management personnel will be critical to our ability to execute our business
model and growth strategy. None of our employees are represented by a labor
union or are subject to a collective bargaining agreement. We believe that our
relations with our employees are good.
FACILITIES
Our executive offices and principal administrative, marketing and sales
operations are located in approximately 7,100 square feet of space in El
Segundo, California. This is approximately 15 miles from downtown Los Angeles.
The lease on this space expires in April 2003. In addition, we lease
approximately 23,089 square feet of space in Manhattan Beach, California
(directly across the street from our headquarters) to house our warehousing,
distribution, data processing and finance operations. This lease expires on
January 31, 2005. See "Certain Transactions". Wareforce recently terminated a
lease in Shelton, Connecticut that housed its Connecticut sales office. This
lease originally expired in July 2003. Wareforce has agreed to pay $3,500 per
month through December 1999 to the Connecticut landlord for canceling the lease
early. Wareforce also leases space on a
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month-to-month basis in an executive suite building in Blue Bell, Pennsylvania
to house its Pennsylvania sales office.
CY has a lease for a sales office in Commerce, California for approximately
3,000 sq. ft., which expires in April 2003; a sales office in Irvine, California
for approximately 2,074 sq. ft. which expires June 30, 2001; and a lease for a
sales office in Encino, California for approximately 2,828 sq. ft. which expires
on December 31, 2000.
In our asset acquisition of Kennsco, we acquired leases for various small
(generally under 1,000 sq. ft.) office locations in the Midwest and Florida. For
the most part, these are leased on a short-term basis. We also acquired a
three-year lease on Kennsco's principal office and warehouse building located in
Plymouth, Minnesota, a suburb of Minneapolis, Minnesota. This location is owned
by Kenneth Searl, our current Vice President and Kennsco's former President. Our
annual lease obligation for this approximately 24,000 sq. ft. facility is
$189,571. We believe that this lease is at competitive market rates. See
"Certain Transactions".
We believe these facilities are adequate for current needs and that
suitable additional or substitute space is available if needed.
LEGAL PROCEEDINGS
We are not currently a party to any material litigation. We are from time
to time involved in routine litigation incidental to our business.
AVAILABLE INFORMATION
We have filed with the United States Securities and Exchange Commission
(the "Commission") a Registration Statement on Form S-1, under the Securities
Act of 1933, as amended (the "Securities Act"), with respect to the securities
offered hereby. As permitted by the rules and regulations of the Commission,
this prospectus does not contain all of the information contained in the
Registration Statement. For further information regarding both us and the
securities we are offering, refer to the Registration Statement, including all
exhibits and schedules. These may be inspected without charge at the public
reference facilities of the Commission's Washington, D.C. office, 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies may be obtained from the
Washington, D.C. office upon request and payment of the prescribed fee.
As of the date of this prospectus, we became subject to the informational
requirements of the Exchange Act. We will therefore file reports and other
information with the Commission. Reports and other information filed by us with
the Commission will be available for inspection and copying at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following regional offices of
the Commission: New York Regional Office, 75 Park Place, New York, New York
10007; Chicago Regional Office, 500 West Madison Street, Chicago, Illinois
60661. Copies of these materials may be obtained from the public reference
section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Commission maintains an Internet Web site that contains
reports, proxy and information statements and other information regarding
issuers that file reports electronically with the Commission. This site is
accessible by the public through any Internet access service provider and is
located at http://www.sec.gov.
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Copies of our annual, quarterly and other reports which will be filed by us
with the Commission beginning with the Quarterly Report for the first quarter
ended after the date of this prospectus (due 45 days after the end of such
quarter). These reports will also be available upon request, without charge, by
writing Wareforce.com, Inc., 2361 Rosecrans Avenue, Suite 155, El Segundo,
California 90245.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table lists our directors and executive officers, their ages,
and all offices and positions with us. Directors are elected for a period of one
year and thereafter serve until the next annual meeting at which their
successors are duly elected by the stockholders. Officers and other employees
serve at the will of the board of directors.
<TABLE>
<CAPTION>
NAME* AGE POSITION
----- --- --------
<S> <C> <C>
Orie Rechtman(1) 47 Chairman, President & Chief Executive Officer
Don Hughes(2) 56 Director, Chief Financial Officer & Chief
Operating Officer
Dan J. Ricketts, Esq.(3) 36 Director, Secretary-Treasurer, Vice President
of Administration and General Counsel
Raymond Wicki 55 Director
Earl Greenberg Director
Darrell Tate(4) 32 Vice President, Strategic Business
Development
Richard Fu(5) 37 Vice President, Sales
Kenneth Searl(6) 53 Vice President, Technical Services
Marcia Mazria(7) 55 Vice President, Marketing and Communications
Leon Hasson(8) 44 President, uMember.com
</TABLE>
- -------------------------
(1) Mr. Rechtman also serves as a director and Chairman, President and Chief
Executive Officer of both CY and Wareforce and as a director and Chairman
and CEO of uMember.com.
(2) Mr. Hughes also serves as a director and Chief Financial Officer, Chief
Operating Officer, Vice President and Treasurer of CY, as a director and
Chief Financial Officer, Chief Operating Officer and Vice President of
Wareforce and as a director and Vice President of uMember.com.
(3) Mr. Ricketts also serves as a director and Secretary, Vice President and
General Counsel of CY, as a director and Secretary-Treasurer, Vice President
and General Counsel of Wareforce and as a director and Acting Vice
President, General Counsel and Assistant Secretary of uMember.com.
(4) Mr. Tate is employed as Vice President, Strategic Business Development for
Wareforce and as a director and Acting Vice President of Sales for
uMember.com and also does work for all our subsidiaries. He resigned his
positions effective August 20, 1999 to pursue outside business
opportunities.
(5) Mr. Fu is employed as Vice President, Sales for us and Vice President and
General Manager for CY but does work for all our subsidiaries.
(6) Kenneth Searl is one of our Vice Presidents and is also Vice President of
Wareforce's Kennsco Technical Services Division.
(7) Ms. Mazria is Vice President, Marketing and Communications for Wareforce but
does work for all our subsidiaries.
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(8) Mr. Hasson is also a director of uMember.com. He is also on the board of
directors of Continental Computer Exchange, the company that purchased the
assets of PSC from Wareforce. See "Related Transactions".
All of our directors hold office until the next annual meeting of the
shareholders and until their successors have been elected and qualified. Our
board of directors elects our officers. This takes place at the board's first
meeting after each annual meeting of our shareholders. The officers hold office
until their death, resignation or removal from office. We have recently formed
both a Compensation Committee and an Audit Committee. Messrs. Wicki and
Greenberg are the members of these committees. Prior to their elections to our
board, our full board served the functions of these committees. No other
committees of the board have been established to date.
These individuals serve as our executive management and/or members of our
board. A brief description of their background and business experience is as
follows:
ORIE RECHTMAN has served as a director and the Chairman, President and CEO
of Wareforce.com since July 1998. He has served as a director and Chairman and
CEO of uMember.com since February 1999. He has served as a director, Chairman,
President and CEO of CY since September 1998. He has been President and a
director of Wareforce since joining Wareforce in September 1989. In February
1998, Mr. Rechtman was appointed to the additional offices of Chairman and CEO
of Wareforce. Mr. Rechtman's experience in the computer field goes back to the
inception of this industry in 1981. At that time, he was involved in
establishing the first distribution channel for computer software to educational
institutions in the U.S. and Israel. As the president of School Computing
Distributors, he merged that business with us in 1990 after completing the
buyout. Prior to arriving in the United States, Mr. Rechtman received a degree
equivalent to a B.S. in Electrical Engineering from the Israeli Air Force in
1972.
LEON HASSON has served as a director and President of uMember.com since its
founding in January 1999. For the two years prior to founding uMember.com, Mr.
Hasson was the CEO of Continental Computer Exchange, a multi-million dollar
computer reseller to corporate customers in the Los Angeles area. Mr. Hasson
remains on the board of Continental. He also serves as a member of the board of
BNL Technologies, Inc., d/b/a Fantom Drives. For the seven years prior to his
service with Continental, Mr. Hasson served a marketing manager for the mail
order department of Data Micro Computers, Inc.
DON HUGHES has served as a director, CFO and COO of Wareforce.com since
July 1998. He has served as a director and Vice President of Finance uMember.com
since February 1999. He has been a director, CFO, COO, Vice President and
Treasurer of CY since September 1998. And he has been Wareforce's Vice
President -- Finance and CFO since joining Wareforce in July 1996. On March 6,
1998, he was elected to the additional position of COO of Wareforce. Since
February 26, 1998, he has also served on Wareforce's board of directors. Prior
to joining Wareforce, Mr. Hughes served as Vice President and CFO of Transoft
Technology Incorporated from October 1995 to July 1996. From 1993 to October
1995, Mr. Hughes was the CFO of Clean-Up Technology, Inc., a contractor
specializing in the environmental remediation business, which recently ceased
operations. From 1992 to 1993, Mr. Hughes was an independent business
consultant, and from 1989 to 1992, Mr. Hughes was the Vice President of Finance
and CFO of Los Angeles Cellular Telephone Company, a cellular telephone service
provider in Los Angeles. Mr. Hughes earned his B.S.E.E. from Virginia
Polytechnic Institute in 1966 and his MBA from the University of Southern
California in 1972.
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<PAGE> 36
DAN J. RICKETTS has served as a director and Secretary-Treasurer, Vice
President of Administration and General Counsel of Wareforce.com since July
1998; as a director of uMember.com and its Vice President and General Counsel
and Assistant Secretary since February 1999; CY's Secretary, Vice President and
General Counsel since September 1998; and has served as Secretary, Vice
President and General Counsel of Wareforce since March 6, 1998. From June 1996
through February 1998 Mr. Ricketts served as Wareforce's Senior Legal Counsel.
From May 1995 when he joined Wareforce to June 1996, Mr. Ricketts served as
Wareforce's Director of Legal and Business Affairs. From May 1997 to July 1998,
Mr. Ricketts also served as the Director of the Wareforce's Education Advantage
Division and from October 1996 to May 1997 served as Wareforce's acting Director
of Human Resources. Mr. Ricketts has served on Wareforce's board of directors
since March 6, 1998; CY's board of directors since September 1998 and Wareforce
One's board of directors since July 1998. Prior to joining we Mr. Ricketts was a
Senior Contracts Specialist with Southern California Edison from February 1994
to April 1995. From August 1992 to February 1994 Mr. Ricketts was Legal Counsel
to Ingram Micro Inc. Mr. Ricketts graduated with a Bachelor of Science in
Finance (with honors) from the University of Tennessee in 1985 and with a law
degree from the University of Tennessee College of Law in 1992. Mr. Ricketts is
currently licensed to practice law in the State of California.
RAYMOND WICKI has served as a director since June 1999. From 1990 to July
1999, Dr. Wicki was the CEO of Bank von Graffenried, a family-owned bank in
Bern, Switzerland. He currently serves as a consultant to the bank. From 1983 to
1990, Dr. Wicki focused on private and industrial portfolio management,
including building and managing the institutional asset management business of a
large Swiss bank. In the late 1970's, Dr. Wicki, with two partners, established
one of the first venture capital funds that invested in the U.S. and in Germany
and Switzerland. For the eight years prior, Dr. Wicki was with the industrial
organization of the Aga Khan, serving as its Head of Finance. Dr. Wicki started
his professional career in the investment department of Hoffmann-La Roche, a
Swiss pharmaceutical group. Dr. Wicki received a business administration degree
and a Ph.D. in finance and taxation from the University of Bern, Switzerland. He
also holds an MBA from Kent State University in Ohio.
EARL GREENBERG has served as a director since June 1999. Mr. Greenberg is
currently the President of Earl Greenberg Productions, Inc. and Co-Chairman of
Transactional Marketing Consultants. Mr. Greenberg served as President and CEO
of Transactional Media, Inc. until 1995. Mr. Greenberg has also served as
President of HSN Entertainment, an arm of the Home Shopping Network and Quantum
Marketing, a pioneer in the Infomercial format. Mr. Greenberg has also been an
independent producer, serving as Executive Producer for such shows as The Regis
Philbin Show. From 1981 - 1984, Mr. Greenberg served as Vice President,
Compliance and Practices for NBC-TV and Vice President-In-Charge of Daytime
Programming. He graduated from the University of Pennsylvania School of Law and
practiced corporate and antitrust law from the late 1960's to 1978. Mr.
Greenberg is a member of the board of the Electronic Retailing Association.
DARRELL TATE joined Wareforce in December 1994 as Director of Sales and
became its Vice President, Worldwide Sales and Marketing in July 1996. Mr. Tate
served on the Wareforce board of directors from November 1995 through August
1996, at which time he was removed from the board as part of the ongoing divorce
proceeding involving Mr. Rechtman and Ms. Gabriel. Mr. Tate rejoined the board
on March 6, 1998 and
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<PAGE> 37
subsequently resigned his position from the board on May 19, 1998 in order to
take a leave of absence from Wareforce. Mr. Tate returned to Wareforce in late
November 1998 as was appointed its Vice President of Strategic Business
Development. He has served as a director of uMember.com and its Vice President
of Sales since February 1999. Mr. Tate has over ten years of experience in the
PC industry. From June 1991 to December 1994, Mr. Tate was a Reseller Account
Manager with Microsoft Corporation where he had responsibility for managing some
of Microsoft's largest multi-location resellers across the country. From May
1990 to June 1991, Mr. Tate served as Product Manager with O'Neil Product
Development. From January 1987 to March 1990, Mr. Tate was Marketing Manager for
Instant Replay Corporation. Mr. Tate received a B.A. in Organizational
Communications from the University of Utah in 1989. Mr. Tate resigned on August
20, 1999 to pursue outside business interests.
RICHARD FU has over 15 years of industry experience in corporate
Information Services management, computer reseller and system integrator
environment and has served as the Vice President of Sales of Wareforce
Incorporated since September 1998 and as Vice President/General manger for
Impres since 1995. Mr. Fu also served as the Director of the Advanced Technical
Services division of Microage of Commerce, CA (a former d/b/a of CY) from 1995
to 1998. Prior to joining CY, Mr. Fu served as Financial Systems Manger for
GlenFed Services Corporation from 1992 to 1995. Mr. Fu also has served in
various Information Services management roles and consulted for construction and
real estate development companies. Mr. Fu has a B.S. degree in Computer Science
from UCLA.
MARCIA MAZRIA has served as Vice President of Marketing and Communications
since joining Wareforce.com in July 1998. From 1991 to July 1998, she was
President of Mazria Leeds, Inc., Marketing Consultants, providing independent
marketing consulting services to a variety of companies. From 1975 to 1990, Ms.
Mazria was President/CEO of Mediaworks, Inc., a full service regional marketing
and advertising firm serving clients primarily in the high tech, government,
energy, hospitality and construction industries. Ms. Mazria holds a BA/Design
(with Honors) from Pratt Institute, New York, and a MA/Communications from the
University of New Mexico.
KENNETH SEARL has served as a Vice President of Wareforce.com since May
1999 and has been a Wareforce Vice President of Technical Services responsible
for its Kennsco Technical Services Division since May 1999. For the
approximately 25 years prior to our acquisition of the assets of Kennsco, Mr.
Searl served as Kennsco's Chairman, CEO and President and was involved in a wide
variety of management, sales and leasing activities for Kennsco. Mr. Searl has
participated in the American Management Association's President's Leadership
Program and received a Bachelor of Science degree in Economics from the
University of Wisconsin.
We currently have no arrangements or understandings about the length of
time each director may serve.
We may adopt provisions in our by-laws and/or articles of incorporation to
divide our board of directors into more than one class and to elect each class
for a certain term. These provisions may have the effect of discouraging
takeover attempts or delaying or preventing a change of control of us.
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<PAGE> 38
COMPANY COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The board of directors has recently formed a Compensation Committee
composed of our two outside directors. The CEO will make recommendations
concerning salaries and incentive compensation for our executive officers,
directors and managers to the compensation committee. The compensation committee
will then make recommendations for the full board's approval. For information
concerning transactions with the our directors and entities affiliated with
certain directors, see "Certain Relationships and Related Transactions."
EXECUTIVE COMPENSATION
The following table summarizes executive compensation paid or accrued
during the past three fiscal years for our Chief Executive Officer during that
period and the most highly compensated executive officers whose total annual
salary and bonus exceeded $100,000 during those years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER
ANNUAL RESTRICTED LPIT ALL OTHER
NAME AND COMPEN- STOCK UNDERLYING PAYOUTS COMPEN-
PRINCIPAL POSITION YEAR SALARY($) BONUS($) SATION($) AWARD(S)($) OPTIONS/SARS(#) ($) SATION($)
------------------ ---- --------- -------- --------- ----------- --------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Orie Rechtman........ 1998 239,220(3) 90,780
CEO 1997 148,440
1996 214,349
Don Hughes........... 1998 141,250(4) 10,000 49,750
CFO 1997 135,346
1996 56,866
Dan Ricketts......... 1998 79,999(5) 38,967(9) 49,750
VP & General 1997 88,788
Counsel 1996 61,330
Darrell Tate......... 1998 45,833(6) 10,000 24,876 500(10)
VP, Business 1997 130,657
Development(1) 1996 107,924
Richard Fu........... 1998 169,953(7) 10,000 1,750(11) 33,359 146
VP, Sales(2) 1997 --
1996 --
Marcia Mazria........ 1998 40,000(8)
VP, Marketing
</TABLE>
- -------------------------
(1) Mr. Tate was on unpaid sabbatical from May 19, 1998 to November 30, 1998.
Mr. Tate resigned on August 20, 1999 to pursue outside business interests.
(2) Amounts for Mr. Fu include compensation from C.Y. during January - August
1998 as well as compensation from us from September - December 1998.
(3) On June 1,1998, Wareforce Incorporated entered into an employment contract
with Mr. Rechtman which, among other things, increased his base salary from
approximately $150,000 per year to $330,000 per year and granted him a
bonus of up to $170,000 per year based on it meeting at least 90% of its
annual projections. Mr. Rechtman receives no salary for his work with
uMember.com but has been awarded by the uMember.com board 250,000
fully-vested options to purchase the shares of uMember.com for his service
to uMember.com to date.
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<PAGE> 39
(4) On June 1, 1998, Wareforce Incorporated entered into a new employment
contract with Mr. Hughes that, among other things, increased his base
salary from $120,000 per year to $150,000 per year. Mr. Hughes receives no
salary for his work with uMember.com but has been awarded by the
uMember.com board 25,000 fully vested options to purchase the shares of
uMember.com for his service to date.
(5) On June 1, 1998, Wareforce Incorporated entered into an employment contract
with Mr. Ricketts. Among other things, this contract increased his base
salary from $50,000 per year to $100,000 per year (amended on July 14, 1998
to $110,000 per year). It also granted him a one-time bonus of $10,000 for
the successful completion of our Reverse Merger and a bonus of $50,000 per
year based on his meeting at least 90% of the annual goals set for him by
the board. Mr. Ricketts receives no salary for his work with uMember.com
but has been awarded by the uMember.com board 25,000 fully vested options
to purchase the shares of uMember.com for his service to date.
(6) On June 1, 1998, Wareforce Incorporated entered into an employment contract
with Mr. Tate. Among other things, this contract increased his base salary
from $60,000 per year to $110,000 per year and granted him a bonus of
$50,000 per year based on his meeting at least 90% of the annual goals set
for him by the board. Mr. Tate receives no salary for his work with
uMember.com but has been awarded by the uMember.com board 25,000 fully
vested options to purchase the shares of uMember.com for his service to
date. Mr. Tate gave up his rights to exercise these uMember.com options
upon his resignation from Wareforce.
(7) On August 28, 1998, as part of our purchase of CY, we entered into an
employment contract with Mr. Fu. Among other things, this contract granted
him a base salary of $110,000 per year, a one-time signing bonus of
$10,000, a bonus of $50,000 per year based on his meeting at least 90% of
certain goals related to the gross revenues of Impres' and, if Impres'
revenues exceed 125% of their annual goal, an additional bonus equal to
0.01% of the revenues of Impres that exceed Impres' annual revenue goal.,
and 33,359 non-cash incentive stock options granted at a fair market value
of $5.00 per share.
(8) Ms. Mazria served as an independent consultant to Wareforce in 1996 and
again from February 1998 to June 1998. We paid $17,590 for her independent
consulting services in 1998. On July 1, 1998, Wareforce Incorporated
entered into an employment contract with Ms. Mazria. Among other things,
this contract provides for a base salary of $80,000 per year, a $5,000
quarterly bonus and a bonus plan to be established based on Co-op and
Market Development Funds obtained under her supervision.
(9) Includes $2,000 auto allowance.
(10) Includes $500 auto allowance.
(11) Includes $1,750 auto allowance.
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<PAGE> 40
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows the grants of stock options to our CEO and our
four most highly compensated executive officers, other than our CEO, for the
year ended December 31, 1998. We have never granted any stock appreciation
rights. The exercise price per share of each option was equal to the fair market
value of the common stock on the date of grant as determined by the closing
price of our shares on the NASD Over-the Counter Electronic Bulletin Board
system. The potential realizable value is calculated based on the term of the
option at its time of grant (ten years). It is calculated assuming that the fair
market value of common stock on the date of grant appreciates at the indicated
annual rate compounded annually for the entire term of the option. It also
assumes that the option is exercised and sold on the last day of its term for
the appreciated stock price. These numbers are calculated based on the
requirements of the Securities and Exchange Commission and do not reflect our
estimate of future stock price growth.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------
TOTAL
NUMBER OF OPTION
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE
OPTIONS IN FISCAL PRICE PER EXPIRATION
NAME GRANTED # YEAR (%)(1) SHARE ($/SH) DATE
- --------------------------- ---------- ------------ ------------- ----------
<S> <C> <C> <C> <C>
Orie Rechtman.............. 100,000 15.0 $3.00 7/13/08
Don Hughes................. 101,248 15.2 0.49 3/31/08
20,000 3.0 3.00 7/13/08
Dan Ricketts............... 101,248 15.2 0.49 3/31/08
20,000 3.0 3.00 7/13/08
Richard Fu................. 33,359 5.0 5.00 9/01/08
20,000 3.0 5.00 9/01/08
Darrell Tate............... 50,624 7.6 0.49 3/31/08
50,624 7.6 0.49 3/31/08
20,000 3.0 3.00 7/13/08
</TABLE>
- ---------------
(1) Based on options to purchase a total of 665,479 shares of our common stock
granted under the 1996 Employee Stock Option/Stock Issuance Plan and the
1998 Stock Option/Stock Issuance Plan by us in the year ended December 31,
1998 to our employees, consultants and directors.
FISCAL YEAR END OPTION VALUES
The following table gives you summary information concerning stock options
held as of December 31, 1998 by our CEO and our four most highly compensated
executive officers, other than our CEO. During 1998, Messrs. Hughes and Ricketts
exercised the 41,116 options (101,248 post-split) they respectively received
under the 1996 Plan and Mr. Tate exercised the 20,558 (50,624 pot-split) options
he received under the 1996 plan. These options were exercised in conjunction
with our reverse merger with Jolley. The exercise price of $1.21 ($0.49
post-split) per share was the same as the fair market value our board determined
on the date of exercise. No options issued under the 1998 Plan were exercised
during fiscal 1998 by any of the officers. The value of unexercised in-the-money
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<PAGE> 41
options at fiscal year-end is based on $6.00 per share, the fair market value of
our common stock as quoted on the Bulletin Board at closing on December 31,
1998, less the exercise price per share.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING IN-THE-MONEY OPTIONS AT FISCAL
UNEXERCISED OPTIONS YEAR-END
-------------------------------- ------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME ------------- --------------- ------------ --------------
<S> <C> <C> <C> <C>
Orie Rechtman................ 0 100,000 $ 0 $300,000
Don Hughes................... 0 20,000 0 60,000
Dan Ricketts................. 0 20,000 0 60,000
Richard Fu................... 33,359 20,000 33,359 20,000
Darrell Tate................. 0 20,000 0 60,000
</TABLE>
OPTION/SAR GRANTS
We have not granted any stock appreciation rights to any officer, director
or employee.
Previously, the Wareforce board of directors granted options to purchase
121,000 shares under Wareforce's 1996 Stock Option/Stock Issuance Plan to
various officers and employees of Wareforce. This was done as part of
Wareforce's efforts to undergo an Initial Public Offering. Each option was
immediately exercisable for all of the option shares. However, any shares
purchased under the option were subject to repurchase by Wareforce at the option
exercise price paid per share. Wareforce could do this if the optionee left
Wareforce before vesting in the shares. The weighted average exercise price per
share for the options outstanding under the 1996 Plan was $2.78. Each Twenty
five percent of each option would have vested upon the optionee's completion of
one year of service with Wareforce. This was measured from the grant date. The
remaining option shares would have vested in 36 equal, successive monthly
installments over the optionee's continued period of service thereafter. In
addition, the options would have vested in full upon the acquisition of
Wareforce by merger or asset sale. This vesting would not have occurred if the
options had been assumed by, and the repurchase rights are assigned to, the
acquiring company. Any assumed options would have subsequently vested in full in
the event the optionee's service was terminated by the acquiring company. This
would have happened whether the termination was involuntarily or through a
resignation for good reason, within eighteen months following the acquisition.
The options had a maximum term of ten years measured from the grant date,
subject to earlier termination upon the optionee's termination of service with
the company. However, on September 18, 1997, the Wareforce board of directors
rescinded all grants under the IPO Grant prior to notification to the optionees
of their option grants. The IPO Grant was rescinded, as a material condition of
the grants -- the completion of an IPO -- never transpired. Wareforce is unable
to assess, what, if any, liability may incur from this grant rescission. See
"1998 Stock Option/Stock Issuance Plan."
On April 1, 1998, we granted to Messrs. Hughes and Ricketts fully vested
options for 41,116 shares at a fair market exercise price of $1.21 per share.
(Post-split these amounts were 101,248 options at an exercise price of $0.49 per
share.) Mr. Tate was granted 20,558 fully vested options at a fair market
exercise price of $1.21 per share. (Post-split these amounts were 50,624 options
at an exercise price of $0.49 per share.) Mr. Tate was granted an additional
20,558 options at a fair market exercise price of $1.21 per share which would
automatically vest if he returned from a planned sabbatical by May 18, 1999.
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<PAGE> 42
(Post-split these amounts were 50,624 options at an exercise price of $0.49 per
share.) As part of the reverse merger with Jolley Vending, Messrs. Hughes,
Ricketts and Tate were required to exercise all their then-vested options. See
"Certain Transactions". Mr. Tate subsequently returned from his sabbatical in
November 1998 and became entitled to his additional 50,624 (post-split) options.
The Company did not issue these to him until June 2, 1999. As of the date of
this prospectus he has not exercised these options. See "Management" and
"Principal Shareholders".
1998 STOCK OPTION/STOCK ISSUANCE PLAN
The Wareforce 1996 Plan was subsumed by the 1998 Wareforce One, Inc. Stock
Option/Stock Issuance Plan which was adopted by the board of directors and
approved by the stockholders on July 2, 1998. One million shares of common stock
have been authorized for issuance under the 1998 Plan. On the first trading day
of each calendar year, beginning with 1997, this share reserve automatically
increases by the number of shares equal to 1% of the number of shares of common
stock outstanding on the last day of the preceding calendar year. In no event
may any one participant in the 1996 Plan receive option grants or direct stock
issuances for more than 100,000 shares in the aggregate in any calendar year.
The 1998 Plan is divided into three separate components:
(i) the Discretionary Option Grant Program under which eligible
individuals may, at the discretion of the 1996 Plan administrator, be
granted options to purchase shares of common stock at an exercise price not
less than 85% of their fair market value on the grant date;
(ii) the Stock Issuance Program under which such persons may, in the
1996 Plan administrator's discretion, be issued shares of common stock
directly, through the purchase of such shares at a price not less than 85%
of their fair market value at the time of issuance, or as a bonus for past
services rendered to we or as an incentive tied to the performance of
future services; and
(iii) the Automatic Option Grant Program under which option grants
will automatically be made at periodic intervals to eligible non-employee
Board members to purchase shares of common stock at an exercise price equal
to 100% of their fair market value on the grant date.
The Compensation Committee of the board will administer the Discretionary
Option Grant Program and the Stock Issuance Program. The Vice
President -- Administration as 1998 Plan administrator will have complete
discretion to determine which eligible individuals are to receive option grants
or stock issuances, the time or times when such option grants or stock issuances
are to be made, the number of shares subject to each such grant or issuance, the
status of any granted option as either an incentive stock option or a
non-statutory stock option under the federal tax laws, the vesting schedule (if
any) to be in effect for the option grant or stock issuance and the maximum term
for which any granted option is to remain outstanding.
Upon an acquisition of us by merger, asset sale or hostile takeover of our
company, each outstanding option and unbelted stock issuance will be subject to
accelerated vesting under certain circumstances.
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<PAGE> 43
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from us
equal to the excess of (i) the fair market value of the vested shares of common
stock subject to the surrendered option over (ii) the aggregate exercise price
payable for such shares. Such appreciation distribution may be made in cash or
in shares of common stock.
The plan administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program. The plan
administrator can do this in return for the grant of new options for the same or
different number of option shares with an exercise price per share based upon
the fair market value of the common stock on the new grant date. The plan
administrator may also provide financial assistance to participants in the
Discretionary Option Grant and Stock Issuance Programs by allowing them to
acquire shares of common stock in exchange for promissory notes or installment
payments.
Under the Automatic Option Grant Program, at any time an individual first
becomes a non-employee board member, may, at any time thereafter, receive a
10,000 share option grant on the date such individual joins the board, provided
such individual has not been in the prior employ of us. In addition, at each
annual meeting of our stockholders, each individual who has served as a
non-employee board member for at least six months and who will continue to serve
as a non-employee board member will receive an additional option grant to
purchase 10,000 shares of common stock. This non-employee board member will
receive this option whether or not such individual has been in our prior employ.
Each option granted under the Automatic Option Grant Program will have a
maximum term of 10 years, subject to earlier termination following the
optionee's cessation of service on the board of directors. Each such option will
be immediately exercisable; however, any shares purchased upon exercise of the
option will be subject to repurchase should the optionee's service as a
non-employee Board member cease prior to vesting of the shares. The initial
10,000-share grant will vest in four equal and successive annual installments
over the optionee's period of Board service. Each additional 10,000-share grant
will vest upon the optionee's completion of one year of Board service measured
from the grant date. However, each outstanding option will immediately vest
upon:
(i) certain changes in the ownership or control of us; or
(ii) the death or disability of the optionee while serving as a Board
member.
The board may amend or modify the 1998 Plan at any time. The 1998 Plan will
terminate on July 13, 2008, unless sooner terminated by the board.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
As set forth in the following paragraphs, all of our executive officers
have employment contracts with us. In connection with an acquisition of us by
merger or asset sale, each outstanding option held by the CEO and the other
executive officers under the 1998 Plan will automatically vest in full. The only
exception to this is if such options are to be assumed by, and the repurchase
rights are assigned to, our successor corporation. Any assumed options will
subsequently vest in full in the event an executive officer's service is
terminated by the acquiring company, whether involuntarily or through a
resignation for
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<PAGE> 44
good reason, within eighteen months following the acquisition. The plan
administrator has authority to provide for the accelerated vesting of the shares
of common stock subject to outstanding options held by the CEO and our other
executive officers granted under the 1998 Plan. The plan administrator may do
this if their employment is to be terminated (whether involuntarily or through a
resignation for good reason) following a hostile take-over of us and the
takeover is effected through a successful tender offer for more than 50% of our
outstanding common stock; or a change in the majority of the Board as a result
of one or more contested elections for board membership.
In June 1998, Wareforce Incorporated entered into an employment agreement
with Don Hughes that provides for an initial employment term of three years. It
also provides for an initial annual base salary of $135,000 (increased by
amendment on August 1, 1998 to $150,000). It provides for a one-time bonus of
$10,000 for the successful completion of our Reverse Merger and an annual bonus
of $50,000 if he meets at least 90% of the annual goals set for him by the
board. Under the terms of the agreement, Mr. Hughes is entitled to participate
in any employee benefit programs established for our executive employees.
Wareforce Incorporated may terminate the agreement for cause at any time upon
seven days written notice. Mr. Hughes however has 90 days to cure the cause of
the termination. Wareforce Incorporated may terminate the agreement without
cause upon 30 days written notice. If it terminates without cause, it would owe
Mr. Hughes all salary, benefits and bonuses owed to him through the date of
termination. It would also owe him a cash severance payment equal to 18 months
base salary. This June 1998 employment agreement superceded one Mr. Hughes had
entered into with Wareforce Incorporated in July 1996.
In June 1998, Wareforce Incorporated entered into an employment agreement
with Orie Rechtman that provides for an initial employment term of three years,
an initial annual base salary of $330,000 and an annual bonus of $170,000 if it
meet at least 90% of its annual projections. Under the terms of the agreement,
Mr. Rechtman is entitled to participate in any employee benefit programs
established for our executive employees. This includes a monthly auto allowance
of $2,000 per month. Wareforce Incorporated may terminate the agreement for
cause at any time upon seven days written notice. Mr. Rechtman however has 90
days to cure the cause of the termination. Wareforce Incorporated may terminate
the agreement without cause upon 30 days written notice. If it terminates
without cause, it would owe Mr. Rechtman all salary, benefits and bonuses owed
to him through the date of termination. It would also owe him a cash severance
payment equal to five years base salary plus bonuses calculated at their maximum
rate.
In June 1998, Wareforce Incorporated entered into an employment agreement
with Dan Ricketts that provides for an initial employment term of three years.
It also provides for an initial annual base salary of $100,000 (increased by
amendment on July 14, 1998 to $110,000). It provides for a one-time bonus of
$10,000 for the successful completion of our Reverse Merger and an annual bonus
of $50,000 if he meets at least 90% of the annual goals set for him by the
board. Under the terms of the agreement, Mr. Ricketts is entitled to participate
in any employee benefit programs established for our executive employees. This
includes a monthly auto allowance of $500 per month. Wareforce Incorporated may
terminate the agreement for cause at any time upon seven days written notice.
Mr. Ricketts however has 90 days to cure the cause of the termination. Wareforce
Incorporated may terminate the agreement without cause upon 30 days written
notice. If it terminates without cause, we would owe Mr. Ricketts all salary,
benefits and bonuses owed
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<PAGE> 45
to him through the date of termination. It would also owe him a cash severance
payment equal to 18 months base salary.
In June 1998, Wareforce Incorporated entered into an employment agreement
with Darrell Tate that provides for an initial employment term of three years.
It also provides for an initial annual base salary of $110,000. It provides for
an annual bonus of $50,000 if he meets at least 90% of the annual goals set for
him by the board. Under the terms of the agreement, Mr. Tate is entitled to
participate in any employee benefit programs established for our executive
employees. This includes a monthly auto allowance of $500 per month. Wareforce
Incorporated may terminate the agreement for cause at any time upon seven days
written notice. Mr. Tate however has 90 days to cure the cause of the
termination. Wareforce Incorporated may terminate the agreement without cause
upon 30 days written notice. If it terminates without cause, it would owe Mr.
Tate all salary, benefits and bonuses owed to him through the date of
termination. It would also owe him a cash severance payment equal to 18 months
base salary. Mr. Tate resigned on August 20, 1999 to pursue outside business
interests.
In July 1998, Wareforce Incorporated entered into an employment agreement
with Marcia Mazria that provides for an initial employment term of three years.
It also provides for an initial annual base salary of $80,000. It provides for
an quarterly bonus of $5,000, plus it provides for the establishment within 90
days of the date of signing the agreement of a bonus plan based on the amount of
Co-op and Market Development Funds collected under her supervision. She also
received options for 5,000 shares of our stock. These options were fully vested
and may exercised on a non-cash basis. Under the terms of the agreement, Ms.
Mazria is entitled to participate in any employee benefit programs established
for our executive employees. Wareforce Incorporated may terminate the agreement
for cause at any time upon seven days written notice. Ms. Mazria however has 90
days to cure the cause of the termination. Wareforce Incorporated may terminate
the agreement without cause upon 30 days written notice. If it terminates
without cause, it would owe Ms. Mazria all salary, benefits and bonuses owed to
him through the date of termination. It would also owe her a cash severance
payment equal to 9 months base salary.
In August 1998, Wareforce Incorporated entered into an employment agreement
with Richard Fu that provides for an initial employment term of three years. It
also provides for an initial annual base salary of $110,000. It provides for a
one-time signing bonus of $10,000 and an annual bonus of $50,000 if CY meets at
certain revenue targets set by its Board. Additionally, if CY meets at least
125% of its revenue goals, he will receive an additional bonus of .01% of any
revenue amounts that exceed the revenue goal. Mr. Fu was also granted 33,359
non-cash incentive stock options, exercisable at $5.00 per share, upon his
signing the employment agreement. Under the terms of the agreement, Mr. Fu is
entitled to participate in any employee benefit programs established for our
executive employees. This includes a monthly auto allowance of $500 per month.
We may terminate the agreement for cause at any time upon seven days written
notice. Mr. Fu however has ninety days to cure the cause of the termination. We
may terminate the agreement without cause upon 30 days written notice. If we
terminate without cause, we would owe Mr. Fu all salary, benefits and bonuses
owed to him through the date of termination. We would also owe him a cash
severance payment equal to 18 months base salary.
In May 1999, Wareforce Incorporated and we entered into an employment
agreement with Kenneth Searl that provides for an initial employment term of
three years. It also provides for an initial annual base salary of $225,000. It
provides for an annual bonus if he
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<PAGE> 46
meets at least 90% of the annual goals set for him by our board. Additionally,
if the Kennsco Technical Services Division generates Earnings Before Interest,
Taxes, Depreciation and Amortization in the 12 month period commencing March 1,
1999 of at least $630,000, we will pay him a bonus of $210,000, payable in 12
installments. For the next three years we are also obligated to pay him each
quarter 50% of the gross margin (less costs) for lease transactions recorded by
the Division. Under the terms of the agreement, Mr. Searl is entitled to
participate in any employee benefit programs established for our executive
employees. We may terminate the agreement for cause at any time upon seven days
written notice. Mr. Searl however has 90 days to cure the cause of the
termination. We may terminate the agreement without cause upon 30 days written
notice. If we terminate without cause, we would owe Mr. Searl all salary,
benefits and bonuses owed to him through the date of termination. We would also
owe him a cash severance payment equal to 12 months base salary.
In our Letter of Agreement with uMember.com in which we purchased 70% of
the outstanding shares of uMember.com, we agreed that Mr. Hasson would be paid
$75,000 annually for his service as President of uMember.com.
Both Wareforce and CY have employment agreements with certain other non-
executive officers and employees whose terms and conditions are similar to
others in the industry.
DIRECTOR REMUNERATION
The directors do not receive compensation for services on the board of
directors or any committee thereof but are reimbursed for their out-of-pocket
expenses in serving on the board of directors. Non-employee Board members will
be eligible to receive periodic option grants pursuant to the Automatic Option
Grant Program in effect under the 1998 Plan. See "1998 Stock Option/Stock
Issuance Plan."
CONFLICTS OF INTEREST
Other than as described herein we are not expected to have significant
further dealings with affiliates. However, if there are such dealings the
parties will attempt to deal on terms competitive in the market and on the same
terms that either party would deal with a third person. Presently none of the
officers and directors has any transactions which they contemplate entering into
with the Company, aside from the matters described herein.
Management will attempt to resolve any conflicts of interest that may arise
in favor of us. Failure to do so could result in fiduciary liability to
management.
INDEMNIFICATION AND LIMITATION OF LIABILITY OF MANAGEMENT
The General Corporation Law of Nevada permits provisions in the articles,
by-laws or resolutions approved by shareholders which limit liability of
directors for breach of fiduciary duty to certain specified circumstances,
namely, breaches of their duties of loyalty, acts or omissions not in good faith
or which involve intentional misconduct or knowing violation of law, acts
involving unlawful payment of dividends or unlawful stock purchases or
redemptions, or any transaction from which a director derives an improper
personal benefit. Our by-laws indemnify our officers and directors to the full
extent permitted by Nevada law. The by-laws with these exceptions eliminate any
personal liability of a director to our shareholders for monetary damages for
the breach of a
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<PAGE> 47
director's fiduciary duty and therefore a director cannot be held liable for
damages to the Company or its shareholders for gross negligence or lack of due
care in carrying out his fiduciary duties as a Director. Our articles provide
for indemnification to the full extent permitted under law which includes all
liability, damages and costs or expenses arising from or in connection with
service for, employment by, or other affiliation with the Company to the maximum
extent and under all circumstances permitted by law. Nevada law permits
indemnification if a director or officer acts in good faith in a manner
reasonably believed to be in, or not opposed to, the best interest's of the
corporation. A director or officer must be indemnified as to any matter in which
he successfully defends himself. Indemnification is prohibited as to any matter
in which the director or officer is adjudged liable to the corporation. Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers, and controlling persons pursuant to the
foregoing provisions or otherwise, have been been advised that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
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<PAGE> 48
CERTAIN TRANSACTIONS
Wareforce Incorporated has various notes due from Mr. Rechtman, our CEO and
majority shareholder totaling approximately $3.3 million. These notes include
$2.0 million advanced to this shareholder to purchase 3.4 million shares of
common stock of Wareforce Incorporated from its former majority shareholder that
is also Mr. Rechtman's former wife, in February 1998. The notes are due in
varying amounts from December 2000 through December 2008 and bear interest at
rates from 5.83% to 6.48%. These shares are pledged as collateral for our line
of credit. In addition, we have made advances to Mr. Rechtman. Total advances
without a promissory note are $0.8 million as of December 31, 1998. The
shareholder plans to repay these advances beginning in fiscal year 2000 through
2008. See footnote 11 to the 1998 financial statements.
Pursuant to a commercial lease dated June 1, 1995, Mr. Rechtman and Ms.
Gabriel, each of whom was then a director and officer of Wareforce, leased to
Wareforce Incorporated certain premises owned by them located in El Segundo,
California to house our distribution operations. Under the lease, which had a
term of five years, Wareforce had annual rental obligations to Mr. Rechtman and
Ms. Gabriel totaling approximately $122,400. As part of Mr. Rechtman and Ms.
Gabriel's June 1997 property settlement resulting from their divorce, Mr.
Rechtman was awarded sole possession of this property and all rents derived
therefrom. Prior to Mr. Rechtman and Ms. Gabriel purchasing the distribution
facility and leasing it to us, a third party was the owner of the facility and
leased it to us at a monthly rent of approximately $10,500. In August 1998 Mr.
Rechtman sold this facility and our lease and rental obligations were terminated
at that time and we acquired alternate space from an independent third party.
See "Facilities".
On May 16, 1997, an order was entered in the Superior Court for the State
of California, County of Los Angeles (the "Court"), dissolving the marriage of
Mr. Rechtman and Ms. Gabriel. On July 30, 1997, a Stipulation for Partial
Division of Community Property and Order Thereon was filed with the Court. On
February 26, 1998, the Court entered a Further Judgment on Reserved Issues (the
Further Judgement") which determined additional property rights between Mr.
Rechtman and Ms. Gabriel. Pursuant to the Further Judgment, Mr. Rechtman
acquired all of Ms. Gabriel's stock in Wareforce Incorporated for $2,000,000. As
a result of this acquisition, Mr. Rechtman held 2,750,000 shares (pre-2.4625:1
exchange), constituting 100% of Wareforce Incorporated's outstanding common
stock. At the time of the acquisition, Ms. Gabriel resigned as an officer and
director of Wareforce. Wareforce loaned the funds used by Mr. Rechtman to
purchase Ms. Gabriel's shares to him. This loan was pursuant to a promissory
note dated February 26, 1998, due February 25, 2008. It bears interest at the
rate of 7.5% per annum, with interest only be payable quarterly beginning April
1, 1998 until maturity. Wareforce obtained the funds loaned to Mr. Rechtman by
borrowing from our line of credit with Finova. See footnote 11 to the 1998
financial statements, "Risk Factors" and "Dependence on Availability of Credit".
In addition, pursuant to the Further Judgment, Mr. Rechtman agreed to:
(1) indemnify Ms. Gabriel against any obligations, debts, liabilities,
claims, charges, taxes, penalties and fines arising out of or in any way
connected with Wareforce Incorporated;
(2) assume all obligations and liabilities (known or unknown, asserted
or unasserted, matured or unmatured, absolute or contingent) owing by Ms.
Gabriel to
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<PAGE> 49
Wareforce Incorporated and to cause Wareforce Incorporated to fully release
Ms. Gabriel from all such obligations, including Ms. Gabriel's officer loan
account of approximately $536,000, which includes charges for bonuses and
perquisites paid to Ms. Gabriel in 1996, 1997 and 1998;
(3) cause Wareforce Incorporated to pay any business-related
outstanding debts incurred by Ms. Gabriel on her corporate credit card up
to $10,000 which are not already reflected in Ms. Gabriel's officer loan
account; and
(4) cause Wareforce Incorporated to pay all of Ms. Gabriel's unpaid
attorneys' fees incurred in connection with the divorce through February,
1998, estimated to be $25,000.
In June 1998, Wareforce Incorporated entered into an employment agreement
with Orie Rechtman, the Chairman, CEO and President of Wareforce.com, Wareforce,
CY and the Chairman and CEO of uMember.com.
In June 1998, Wareforce Incorporated entered into an employment agreement
with Don Hughes, Wareforce's CFO, COO and Vice President-Finance; CY's CFO, COO,
Vice President and Treasurer and our CFO and COO. This employment agreement
supercedes one entered into with Wareforce by Mr. Hughes in July 1996.
In June 1998, Wareforce Incorporated entered into an employment agreement
with Dan Ricketts, Wareforce and CY's Vice-President of Administration, General
Counsel and Secretary, our Secretary-Treasurer and the Acting General Counsel
and Assistant Secretary of uMember.com.
In June 1998, Wareforce Incorporated entered into an employment agreement
with Darrell Tate, our Vice President-Strategic Business Development and
uMember.com's Acting Vice President of Sales and Marketing. On August 20, 1999,
Mr. Tate resigned his positions to pursue independent business opportunities.
In July 1998, Wareforce Incorporated entered into an employment agreement
with Marcia Mazria, our Vice President-Marketing and Communications.
In August 1998, we entered into an employment agreement with Richard Fu,
our Vice President-Sales.
In December 1998, we lent Mr. Hughes and Mr. Ricketts $18,450 each, and Mr.
Tate $9,245, to pay taxes resulting from the forced conversion of their stock
options due to our reverse merger with Jolley Vending. These amounts are still
outstanding.
In March 1999, we entered into a lease for a new sales office for CY in
Commerce, California. Mr. Fu's wife, Nora Shen, acted as our Real Estate Broker
in this transaction. The company she works for, Takenaka & Company will receive
total commissions of $9,246 for negotiating this lease. Ms. Shen does not own
any share or interest in Takenaka & Company.
In May 1999, Warefore.com and Wareforce Incorporated jointly entered into
an employment agreement with Kenneth Searl, our Vice President and Wareforce
Incorporated's Vice President of Technical Services.
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<PAGE> 50
In May 1999, under the terms of its Asset Purchase Agreement with Kennsco
as part of the purchase price of the transaction, we issued 51,948 shares of our
common stock in the name of Kennsco, Inc. These shares were issued at fair
market value on the date of issuance. Kenneth Searl beneficially owns these
shares. Wareforce Incorporated also agreed to lease Kennsco's principal office
and warehouse building in Plymouth, Minnesota from Mr. Searl for a three-year
period at $189,571 per year. We believe that this lease is at market rates. We
have agreed to guarantee these lease payments.
49
<PAGE> 51
PRINCIPAL SHAREHOLDERS
The following table contains information about our officers or directors,
and other shareholders who we know to be beneficial owners of more than five
percent (5%) of our stock. A person who is the beneficial owner of stock has or
shares the power to decide how to vote or whether to dispose of the stock.
<TABLE>
<CAPTION>
TITLE OF AMOUNT AND NATURE OF PERCENT
NAME AND ADDRESS CLASS BENEFICIAL OWNERSHIP OF CLASS
---------------- -------- -------------------- --------
<S> <C> <C> <C>
Orie Rechtman............................. Common 5,966,883 shares 55.0%
Von Graffenried AG Privat Bank(1)......... Common 1,250,001 shares 11.5%
Bank Julius Baer & Co. Ltd. .............. Common 939,997 shares 8.7%
Don Hughes................................ Common 101,248 shares 0.9%
Dan Ricketts.............................. Common 66,248 shares 0.6%
All officers and directors as a group (5
persons)................................ Common 6,170,703 shares 57.0%
</TABLE>
- -------------------------
(1) We believe these are owned by the family of Charles Von Graffenried, Bern,
Switzerland.
These amounts include all shares these persons are deemed to beneficially
own regardless of the form of ownership.
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<PAGE> 52
DESCRIPTION OF SECURITIES
You should read our amended articles of incorporation and bylaws for more
information about our securities. We will provide copies of our articles and
bylaws if you ask us in writing to do so.
COMMON STOCK
We are presently authorized to issue 50,000,000 shares of common stock. As
of June 30, 1999, there were 10,831,948 shares of common stock outstanding. We
have reserved from our authorized but unissued shares a sufficient number of
shares of common stock for issuance of the shares we are offering in this
prospectus. The shares of common stock issuable on completion of the offering
will be, when issued in accordance with the terms of the offering, fully paid
and non-assessable.
The holders of common stock, including the shares now offered, are entitled
to equal dividends and distributions, per share, with respect to the common
stock when, as and if declared by the board of directors from funds legally
available for dividends. No holder of any shares of common stock has a
pre-emptive right to subscribe for any of our securities nor are any common
shares subject to redemption or convertible into our other securities. Upon our
liquidation, dissolution or winding up, and after payment of creditors and
preferred stockholders, if any, the assets will be divided pro-rata on a
share-for-share basis among the holders of the shares of common stock. All
shares of common stock now outstanding are fully paid, validly issued and
non-assessable. Each share of common stock is entitled to one vote with respect
to the election of any director or any other matter upon which shareholders are
required or permitted to vote. Holders of our common stock do not have
cumulative voting rights, so that the holders of more than 50% of the combined
shares voting for the election of directors may elect all of the directors, if
they choose to do so and, in that event, the holders of the remaining shares
will not be able to elect any members to the board of directors.
PREFERRED STOCK
We are also presently authorized to issue 5,000,000 shares of preferred
stock. Under our articles of incorporation, as amended, the board of directors
has the power, without further action by the holders of the common stock, to
designate the relative rights and preferences of the preferred stock, and issue
the preferred stock in such one or more series as designated by the board of
directors. The designation of rights and preferences could include preferences
as to liquidation, redemption and conversion rights, voting rights, dividends or
other preferences, any of which may be dilutive of the interest of the holders
of the common stock or the preferred stock of any other series. The issuance of
preferred stock may have the effect of delaying or preventing a change in
control of us without further shareholder action and may adversely effect the
rights and powers, including voting rights, of the holders of common stock. In
certain circumstances, the issuance of preferred stock could depress the market
price of the common stock. The board of directors effects a designation of each
series of Preferred Stock by filing with the Nevada Secretary of State a
Certificate of Designation defining the rights and preferences of each such
series. Documents filed are matters of public record and may be examined in
accordance with procedures of the Nevada Secretary of State, or copies may be
obtained from us.
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<PAGE> 53
SERIES A AND SERIES B WARRANTS
We have declared a distribution of 1,110,000 Series A and 1,110,000 Series
B common stock purchase warrants to shareholders of record as of July 13, 1998.
The warrants are exercisable at $6.00 and $7.00 per share, respectively, prior
to [the date three years from the date hereof], subject to effectiveness of
registration of the warrants and underlying shares.
(a) We may redeem all or a portion of the warrants, in each case at
$.01 per warrant upon 30 days' prior written notice to the warrant holders.
The warrants may be redeemed at any time after the date of this prospectus,
whether or not a current registration statement is in effect with respect
thereto. Any warrant holder who does not exercise his warrants prior to the
Redemption Date, as set forth on our Notice of Redemption, will forfeit the
right to purchase the shares of common stock underlying such warrants, and
after such Redemption Date any outstanding warrants referred to in the
notice will become void and be canceled. If we do not redeem such warrants,
they will expire at the conclusion of the exercise period unless we extend
them.
(b) We may at any time, extend the exercise period of the warrants
provided that written notice of such extension is given to the warrant
holders prior to the expiration date thereof. Also, we may, at any time,
reduce the exercise price thereof by written notification to the holders.
We do not presently contemplate any extensions of the exercise period or
reduction in the exercise price of the warrants.
(c) The warrants contain anti-dilution provisions with respect to the
occurrence of certain events, such as stock splits or stock dividends. The
anti-dilution provisions do not apply in the event of a merger or
acquisition, such as the Acquisition. In the event of our liquidation,
dissolution or winding-up, warrant holders will not be entitled to
participate in our assets. Warrant holders have no voting, preemptive,
liquidation or other rights of a stockholder of us, and no dividends may be
declared on the warrants.
(d) The warrants may be exercised by surrendering to us, a warrant
certificate evidencing the warrants to be exercised, with the exercise form
included therein duly completed and executed, and paying to us the exercise
price per share in cash or check payable to us. Stock certificates will be
issued as soon thereafter as practicable.
(e) The warrants will not be exercisable unless the warrants and the
shares of common stock underlying the warrants are registered. We have
filed with the Commission a registration statement concerning the issuance
of shares underlying the warrants as soon as practicable following the
acquisition. The effective date of such registration will be the
"Commencement Date" for determining the exercise period of such warrants.
We will also seek to register or qualify the common stock issuable upon the
exercise of the warrants under the Blue Sky laws of states in which holders
of the warrants may reside.
(f) The warrants will be nontransferable by their terms and cannot be
transferred without our consent and will be "restricted securities"
according to the definition of that term used in Rule 144. The warrants
will be stamped with a restrictive legend.
TRANSFER AGENT
Our transfer agent is Interwest Stock Transfer Co., 1981 East 4800 South,
Suite 100, Salt Lake City, Utah 84117.
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<PAGE> 54
ANNUAL REPORTS
We intend to furnish annual reports to shareholders. These reports will
contain financial statements examined by independent certified public
accountants. They may also contain other interim reports.
DIVIDEND POLICY
We have not paid any dividends on common stock to date. We do not
anticipate paying dividends on common stock in the foreseeable future. We intend
for the foreseeable future to follow a policy of retaining all of our earnings,
if any, to finance the development and expansion of our business.
PLAN OF DISTRIBUTION
This prospectus and the registration statement of which it is part relate
to the offer and sale of 2,220,000 shares of our common stock underlying
warrants as well as the shares of the selling shareholders described in this
prospectus. The securities we are registering include 1,110,000 shares of common
stock issuable upon the exercise of the Series A Warrants at an exercise price
of $6.00 per share, and 1,110,000 shares of common stock issuable upon the
exercise of the Series B Warrants, at an exercise price of $7.00 per share. The
warrants are being distributed as a dividend to our shareholders of record as of
July 13, 1998. By their terms, the warrants are nontransferable prior to
exercise and cannot be transferred without the consent of the Company. The
warrants are now exercisable until [the date three years from the date hereof].
The selling stockholders may offer and sell the common stock at their
discretion. They are registering 971,448 shares of their common stock. They can
sell these shares in the over-the-counter market or otherwise. They may sell at
market prices at the time of sale, at prices related to the market price or at
negotiated prices. We will receive no proceeds from the sale of common stock by
the selling stockholders. Each of the selling stockholders may transfer, pledge,
donate or assign their selling stockholders' shares to lenders, family members
and others. If this happens, each of these persons will then be a "Selling
Stockholder" for purposes of this Prospectus. The number of selling
stockholders' shares beneficially owned by those selling stockholders who
transfer, pledge, donate or assign selling stockholders' shares will decrease
when they take these actions. The plan of distribution for selling stockholders'
shares will otherwise remain unchanged, except that the transferees, pledgees,
donees or other successors will be selling stockholders. Under applicable rules
and regulations under the Exchange Act, any person engaged in the distribution
of our common stock may not bid for, or purchase, shares of our common stock
during a period which commences one business day, or 5 business days if our
public float is less than $25 million or our average daily trading volume is
less than $100,000, prior to that person's participation in the distribution,
subject to exceptions for certain passive market making activities. In addition
and without limiting the foregoing, each selling stockholder will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including, without limitation, Regulation M which provisions may
limit the timing of purchases and sales of shares of our common stock by the
selling stockholder.
We are bearing all costs relating to the registration of the shares of
common stock, other than fees and expenses, if any, of counsel or other advisors
to the selling stockholders. Any commissions, discounts or other fees payable to
broker-dealers in
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<PAGE> 55
connection with any sale of the shares of common stock will be borne by the
selling stockholder selling shares of common stock.
There is no assurance that all or any of the shares will be sold, or any
requirement, or escrow provisions to assure that, any minimum amount of warrants
will be exercised. All funds received upon the exercise of any warrants will be
immediately available to us for our use.
THE SELLING STOCKHOLDERS
In addition to the warrants and the shares underlying the warrants it also
covers restricted shares that have been acquired the selling stockholders, named
below, as of June 11, 1999. The following table sets forth the name of each
selling stockholder, the nature of its position, office, or other material
relationship with us, the number of shares of common stock beneficially owned by
each selling stockholder prior to the offering, and the number of shares and (if
one percent or more) the percentage of the class to be beneficially owned by a
selling stockholder after the offering.
<TABLE>
<CAPTION>
SHARES
SHARES OWNED SHARES OWNED
PRIOR TO OFFERED OUTSTANDING AFTER OFFERING
NAME OFFERING(1) HEREIN SHARES(2) PERCENTAGE
---- ------------ ------- ----------- --------------
<S> <C> <C> <C> <C>
Von Graffenried Privat Bank.... 1,250,001 187,500 1,062,501 9.8%
Bank Julius Baer & Co. Ltd..... 939,997 141,000 798,997 7.4%
UBS AG......................... 500,000 75,000 425,000 3.9%
Herbert Towning................ 300,000 300,000 0 0.0%
Swiss Bank Corporation......... 133,332 20,000 113,332 1.0%
Heinrich Auwarter.............. 126,667 19,000 107,667 1.0%
Kennsco, Inc.(3)............... 51,948 51,948 0 0.0%
Steve Keller................... 45,000 45,000 0 0.0%
Continental Computer
Exchange..................... 40,000 40,000 0 0.0%
Leon Hasson, President, Dir. Of
uMember.com.................. 22,500 15,000 7,500 **
Dan Fanym...................... 20,000 20,000 0 0.0%
Shahriar Kashfi................ 20,000 20,000 0 0.0%
Farideh Beral.................. 17,500 10,000 7,500 **
Behzad Eshghieh................ 17,500 10,000 7,500 **
Nasser Ahdout.................. 9,500 2,000 7,500 **
Jahanguir Esfandi.............. 5,000 5,000 0 0.0%
Joseph Yafeh................... 5,000 5,000 0 0.0%
Shahab Morim................... 3,000 3,000 0 0.0%
Brown Brothers Harriman &
Co........................... 2,000 2,000 0 0.0%
</TABLE>
- -------------------------
** Less than 1%
(1) For purposes of this table, each person listed above is deemed to own shares
of common stock if he has the right to acquire the common stock within 60
days of June 11, 1999. For purposes of computing the percentage of
outstanding shares of common stock held by each selling security holder, any
security which they have the right to acquire within such date is deemed to
be outstanding. Except as indicated in the footnotes to this table and
pursuant to applicable community property laws, we believe, based on
information supplied by selling security holder, that they have sole
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<PAGE> 56
voting and investment power with respect to all the shares of common stock
which they own.
(2) Based on a total of 10,831,948 shares of common stock outstanding.
(3) Beneficially-owned by Kenneth Searl, Vice President of the Company.
SHARES ELIGIBLE FOR FUTURE SALE
Of the 10,831,948 shares of our common stock outstanding prior to the
exercise of any warrants, 1,110,000 shares are currently freely tradeable,
971,448 being sold by the selling shareholders under this registration will be
freely tradeable and approximately 8,080,500 became eligible as of July 13, 1999
for public resale under Rule 144 promulgated pursuant to the Securities Act of
1933, as amended (the "Securities Act"). In addition, the 2,220,000 shares of
common stock underlying the Warrants will also be freely tradeable into the
public market immediately upon issuance. Sales of substantial amounts of this
common stock in the public market could adversely affect the market price of the
common stock. Furthermore, all of the remaining shares of common stock presently
outstanding are restricted and/or affiliate securities which are not presently,
but may in the future be sold, pursuant to Rule 144, into any public market that
may exist for the common stock. Future sales by current shareholders could
depress the market prices of the common stock in any such market.
In general, currently, under Rule 144 a person (or group of persons whose
shares are aggregated), including affiliates can sell within any three-month
period, an amount of restricted securities that does not exceed the greater of
1% of the total number of outstanding shares of the same class, or (if the stock
becomes quoted on NASDAQ or a stock exchange), the reported average weekly
trading volume during the four calendar weeks preceding the sale; provided, that
at least one year have elapsed since the restricted securities being sold were
acquired from us or any of our affiliates and provided further that certain
other conditions are also satisfied. If at least two years have elapsed since
the restricted securities were acquired from us or our affiliates, a person who
has not been our affiliate for at least three months can sell restricted shares
under Rule 144 without regard to any limitations on the amount.
WARRANT EXERCISE PROCEDURE
The warrants may be exercised in whole or in part by presentation of the
Warrant Certificate, with the Purchase Form on the reverse side filled out and
signed together with payment of the exercise price and any applicable taxes at
the principal office of Interwest Stock Transfer Co., 1981 East 4800 South,
Suite 100, Salt Lake City, Utah 84117. Payment of the exercise price shall be
made in U.S. dollars in cash or by cashier's or certified check payable to the
order of "Wareforce.com, Inc., Warrant Exercise Account."
All holders of warrants will be given an independent right to exercise
their purchase rights. If, as and when properly completed and duly executed
notices of exercise are received by the Transfer Agent and/or Warrant Agent,
together with the certificates being surrendered and full payment of the
exercise price in cleared funds, the checks or other funds will be delivered to
us and the Transfer Agent and/or Warrant Agent will promptly issue certificates
for the underlying common stock. We estimate that certificates for the shares
will be available for delivery in Salt Lake City, Utah at the close of business
on the tenth business day after the receipt of all required documents and funds.
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<PAGE> 57
LEGAL MATTERS
To our knowledge, there is no material litigation pending or threatened
against us. The validity of the issuance of the shares we are offering will be
passed upon for us by Thomas G. Kimble & Associates, Salt Lake City, Utah.
EXPERTS
The audited consolidated financial statements and schedules included in
this prospectus and elsewhere in the registration statement, to the extent and
for the periods indicated in their reports, have been audited by Arthur Andersen
LLP, Ernst & Young LLP, and Boyum and Barenscheer PLLP, independent public
accountants, and are included herein in reliance upon the authority of said
firms as experts in giving said reports.
CHANGE IN INDEPENDENT ACCOUNTANTS
In June 1998, our board of directors, at our management's recommendation
decided to retain Arthur Andersen LLP as our independent accountants, to replace
Ernst & Young LLP. The decision was made by our board of directors, upon the
recommendation of management, and was not due to any disagreement with Ernst &
Young LLP. During the fiscal year ended December 1996 and through June 1998 we
had no disagreements with Ernst & Young LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which if not resolved to the satisfaction of Ernst & Young LLP, would
have caused them to make reference thereto in their report on our financial
statements. The reports of Ernst & Young LLP on our financial statements for
fiscal 1996 (the last fiscal year audited by Ernst & Young LLP) did not contain
any adverse opinion, disclaimer or opinion or modification as to uncertainty,
audit scope or accounting principles.
56
<PAGE> 58
WAREFORCE.COM INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Wareforce Incorporated and Subsidiary -- Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND AS OF JUNE
30, 1999 (UNAUDITED) AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND
1999 (UNAUDITED)
<TABLE>
<S> <C>
Report of Independent Public Accountants.................... F-2
Report of Independent Auditors.............................. F-3
Consolidated Balance Sheets................................. F-4
Consolidated Statements of Operations....................... F-5
Consolidated Statements of Stockholders' Equity............. F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 59
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Wareforce.com, Inc.:
We have audited the accompanying consolidated balance sheets of
WAREFORCE.COM, INC. (a Nevada corporation) AND SUBSIDIARIES as of December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Wareforce.com, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
--------------------------------------
Arthur Andersen LLP
Los Angeles, California
March 26, 1999
F-2
<PAGE> 60
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Wareforce Incorporated and Subsidiary
We have audited the accompanying consolidated statements of operations and
cash flows for the year ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of Wareforce Incorporated and Subsidiary's
operations and cash flows for the year ended December 31, 1996 in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Woodland Hills, California
July 22, 1997
F-3
<PAGE> 61
WAREFORCE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 383,188 $ 817,721 $ 421,046
Marketable securities....................................... 89,784 41,890 76,022
Trade receivables, net of allowance of $259,900, $450,600,
and $615,000 at December 31, 1997, 1998 and June 30, 1999,
respectively.............................................. 10,814,132 19,753,622 26,702,444
Net investment in sales-type leases......................... -- -- 1,348,161
Other receivables........................................... 1,156,948 280,827 975,882
Inventories................................................. 2,500,378 1,813,543 3,666,590
Prepaid expenses............................................ 115,379 225,952 242,267
Income taxes receivable..................................... 158,652 237,000 234,320
Deferred tax assets......................................... 275,900 631,000 616,133
----------- ----------- -----------
Total current assets................................. 15,494,361 23,801,555 34,282,865
----------- ----------- -----------
PROPERTY AND EQUIPMENT, net................................. 792,707 1,127,495 1,901,593
----------- ----------- -----------
OTHER ASSETS................................................ 13,710 97,723 122,560
----------- ----------- -----------
GOODWILL, net of amortization of $0 at December 31, 1997,
$136,039 at December 31, 1998 and $409,194 at June 30,
1999...................................................... -- 2,701,731 4,422,012
----------- ----------- -----------
Total assets......................................... $16,300,778 $27,728,504 $40,729,030
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit............................................ $ 5,907,845 $10,923,414 $20,105,295
Accounts payable.......................................... 10,143,259 14,340,586 14,763,579
Accrued expenses.......................................... 138,208 901,887 1,132,987
Sales taxes payable....................................... 442,143 670,408 537,375
Current portion of long-term debt......................... 10,450 6,637 928,006
Customer deposits......................................... -- 660,559 206,391
----------- ----------- -----------
Total current liabilities............................ 16,641,905 27,503,491 37,673,633
----------- ----------- -----------
Long-term debt, less current portion........................ 11,137 6,173 714,047
----------- ----------- -----------
Total liabilities.................................... 16,653,042 27,509,664 38,387,680
----------- ----------- -----------
MINORITY INTEREST........................................... -- -- (37,447)
----------- ----------- -----------
COMMITMENTS (Note 13)
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.01 par value, 5,000,000 shares
authorized no shares issued or outstanding............. -- -- --
Common stock, $.001 par value, 50,000,000, authorized
6,771,883, 10,135,000 and 10,831,948 shares issued and
outstanding as of December 31, 1997, 1998 and June 30,
1999, respectively........................................ 1,000 10,135 10,832
Additional paid in Capital.................................. -- 9,544,241 12,183,544
Stock subscriptions......................................... 20,000
Unrealized loss on marketable securities, net of deferred
tax benefit of $13,910 and $13,935 in December 31, 1997
and 1998, and $0 as of June 30, 1999...................... (20,831) (20,783) --
Notes receivable and advances to stockholder................ (991,872) (3,375,600) (3,393,310)
Retained earnings (accumulated deficit)..................... 659,439 (5,959,153) (6,422,269)
----------- ----------- -----------
Total stockholders' equity........................... (352,264) 218,840 2,378,797
----------- ----------- -----------
Total liabilities and stockholders' equity........... $16,300,778 $27,728,504 $40,729,030
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE> 62
WAREFORCE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTH'S ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Revenues................... $88,509,770 $79,621,712 $88,894,828 $34,922,733 $70,797,132
Cost of Goods Sold............. 81,034,366 72,464,751 80,137,798 31,692,055 62,584,400
----------- ----------- ----------- ----------- -----------
Gross Profit............... 7,475,404 7,156,961 8,757,030 3,230,678 8,212,732
Selling, General &
Administrative Expenses...... 6,915,447 6,576,535 11,324,823 3,984,759 8,298,064
Non-recurring Expenses......... 699,212 -- -- -- --
----------- ----------- ----------- ----------- -----------
(Loss) Income from
Operations............... (139,255) 580,426 (2,567,793) (754,081) (85,332)
Interest Expense............... 543,538 490,706 551,136 232,900 315,984
Other Expense (Income)......... (62,668) 6,600 841,932 851,310 61,800
----------- ----------- ----------- ----------- -----------
(Loss) Income Before
Taxes.................... (620,125) 83,120 (3,960,861) (1,838,291) (463,116)
Benefit (Provision) for Income
Taxes........................ 176,002 (21,440) 771,269 357,869 --
----------- ----------- ----------- ----------- -----------
Net (Loss) Income.......... $ (444,123) $ 61,680 $(3,189,592) $(1,480,422) $ (463,116)
=========== =========== =========== =========== ===========
Basic and Diluted (Loss)
Earnings per Share........... $ (0.07) $ 0.01 $ (0.38) $ (0.22) $ (0.04)
=========== =========== =========== =========== ===========
Weighted Average Number of
Common Shares Outstanding.... 6,771,883 6,771,883 8,490,621 6,856,256 10,668,658
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 63
WAREFORCE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED NOTES
COMMON STOCK OTHER RECEIVABLE
-------------------- ADDITIONAL COMPREHENSIVE STOCK FROM
SHARES AMOUNT PAID-IN CAPITAL GAIN(LOSS) SUBSCRIPTIONS STOCKHOLDER
---------- ------- --------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE 12/31/96................ 6,771,883 1,000 -- $(16,796) $ -- $ --
Net income...................... -- -- -- -- -- --
Notes receivable and advances to
stockholder.................... -- -- -- -- -- (991,872)
Unrealized loss on marketable
securities (net of deferred tax
benefit of $2,706)............. -- -- -- (4,035) -- --
Comprehensive loss..............
---------- ------- ----------- -------- -------- -----------
BALANCE 12/31/97................ 6,771,883 1,000 -- (20,831) -- (991,872)
To reflect reverse merger into
par value stock................ -- 6,882 (6,882) -- -- --
Jolley Vending, Inc. shares out-
standing prior to reverse
merger......................... 1,110,000 -- -- -- -- --
Stock issued for compensation at
$.49 per share................. 253,120 253 124,123 -- -- --
Stock issued for conversion of
debt at $3.00 per share........ 1,999,997 2,000 5,998,000
Proceeds from sale of 5,000
shares of common stock
subscriptions from exercise of
stock options.................. -- -- -- -- 20,000 --
Notes receivable and advances to
stockholder.................... -- -- -- -- -- (2,383,728)
Comprehensive loss
Net loss....................... -- -- -- -- -- --
Unrealized gain on marketable
securities (net of deferred
tax benefit of $32).......... -- -- -- 48 -- --
Comprehensive loss..............
Repricing of Series A and B
Warrants....................... -- -- 3,429,000 -- -- --
---------- ------- ----------- -------- -------- -----------
BALANCE 12/31/98................ 10,135,000 10,135 9,544,241 (20,783) 20,000 (3,375,600)
Stock sold in private placement
at $4.00 per share............. 600,000 600 2,149,400 -- -- --
Conversion of stock subscription
to common stock................ 5,000 5 19,995 -- (20,000) --
Stock issued for exercise of
stock options.................. 10,000 10 47,490 -- -- --
Restricted stock issued in April
for 70% interest in uMember.... 30,000 30 172,470 -- -- --
Stock issued as part of purchase
price of Kennsco............... 51,948 52 249,948 -- -- --
Notes receivable and advances to
stockholder.................... -- -- -- -- -- (17,710)
Unrealized gain on marketable
securities (net of deferred
tax benefit of $14,867)...... -- -- -- 20,783 -- --
Net loss........................ -- -- -- -- -- --
Comprehensive loss..............
---------- ------- ----------- -------- -------- -----------
BALANCE AT JUNE 30, 1999
(Unaudited).................... 10,831,948 $10,832 $12,183,544 $ -- $ -- $(3,393,310)
========== ======= =========== ======== ======== ===========
<CAPTION>
RETAINED TOTAL
EARNINGS COMMON
(ACCUMULATED STOCKHOLDERS' COMPREHENSIVE
DEFICIT) EQUITY INCOME (LOSS)
------------ ------------- -------------
<S> <C> <C> <C>
BALANCE 12/31/96................ $ 597,759 $ 581,963 $ --
Net income...................... 61,680 61,680 61,680
Notes receivable and advances to
stockholder.................... -- (991,872) --
Unrealized loss on marketable
securities (net of deferred tax
benefit of $2,706)............. -- (4,035) (4,035)
-----------
Comprehensive loss.............. 57,645
----------- ----------- ===========
BALANCE 12/31/97................ 659,439 (352,264)
To reflect reverse merger into
par value stock................ -- -- --
Jolley Vending, Inc. shares out-
standing prior to reverse
merger......................... -- -- --
Stock issued for compensation at
$.49 per share................. -- 124,376 --
Stock issued for conversion of
debt at $3.00 per share........ 6,000,000
Proceeds from sale of 5,000
shares of common stock
subscriptions from exercise of
stock options.................. -- 20,000 --
Notes receivable and advances to
stockholder.................... -- (2,383,728) --
Comprehensive loss
Net loss....................... (3,189,592) (3,189,592) (3,189,592)
Unrealized gain on marketable
securities (net of deferred
tax benefit of $32).......... -- 48 48
-----------
Comprehensive loss.............. (3,189,544)
===========
Repricing of Series A and B
Warrants....................... (3,429,000) --
----------- -----------
BALANCE 12/31/98................ (5,959,153) 218,840 --
Stock sold in private placement
at $4.00 per share............. -- 2,150,000 --
Conversion of stock subscription
to common stock................ -- -- --
Stock issued for exercise of
stock options.................. -- 47,500 --
Restricted stock issued in April
for 70% interest in uMember.... -- 172,500 --
Stock issued as part of purchase
price of Kennsco............... -- 250,000 --
Notes receivable and advances to
stockholder.................... -- (17,710) --
Unrealized gain on marketable
securities (net of deferred
tax benefit of $14,867)...... -- 20,783 20,783
Net loss........................ (463,116) (463,116) (463,116)
-----------
Comprehensive loss.............. $ (442,333)
----------- ----------- ===========
BALANCE AT JUNE 30, 1999
(Unaudited).................... $(6,422,269) $ 2,378,797
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 64
WAREFORCE.COM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTH'S ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income.......................................... $ (444,123) $ 61,680 $(3,189,592) $(1,480,422) $ (463,116)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization............................ 224,435 242,494 500,772 139,643 541,670
Realized loss on investments............................. -- 46,466 30,629 3,489 --
Provision for bad debts.................................. 93,933 79,726 110,601 49,998 63,999
Deferred taxes........................................... (324,930) 153,042 (355,100) (33,535) 1,519
Reserve for loss on remaining subsidiary assets.......... (335,000)
Stock issued for compensation............................ -- -- 124,376 124,376 --
Minority interest........................................ -- -- -- -- (37,447)
Changes in operating assets and liabilities:
Accounts receivable...................................... (7,245,811) 8,862,004 (239,389) (1,810,951) (5,743,166)
Other receivables........................................ (402,356) (558,787) 1,018,800 513,320 (695,055)
Net investment in sales-type leases...................... -- -- -- -- (78,364)
Inventories.............................................. 467,421 (636,343) 2,067,651 1,695,034 (1,361,837)
Prepaid expenses......................................... (8,658) (46,107) (104,573) (216,705) (16,315)
Income tax receivable.................................... -- (174,791) (163,348) (309,188) 2,680
Other assets............................................. 88,506 17,385 (55,370) (15,789) 45,357
Accounts payable......................................... 1,041,020 3,986,084 (2,349,972) 3,834,011 (761,895)
Accrued expenses......................................... 699,150 (1,065,479) 875,160 452,819 (938,378)
Income taxes payable..................................... (112,623) -- -- -- --
----------- ------------ ----------- ----------- -----------
Net cash (used in) provided by operating activities........ (6,259,036) 10,967,374 (1,729,355) 2,946,100 (9,440,348)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment...................... (320,867) (381,708) (643,497) (220,306) (598,516)
Sale of property and equipment........................... 22,920 -- -- -- --
Sale of subsidiary assets................................ 300,000 -- -- -- --
Proceeds from sale of marketable securities.............. 111,242 623,590 17,315 -- --
Cash used in acquisition................................. -- -- (3,000,000) -- (750,000)
----------- ------------ ----------- ----------- -----------
Net cash provided by (used by) investing activities........ 113,295 241,882 (3,626,182) (220,306) (1,348,516)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change on line of credit borrowings.................. 7,070,061 (10,618,461) 2,047,489 (1,177,681) 8,304,301
Long term debt repayments................................ (210,892) (760,428) (8,777) (4,306) (289,592)
Long-term debt borrowings................................ -- -- -- -- 117,286
Notes receivable and advances to shareholders............ (272,055) (719,817) (2,383,728) (2,282,761) (17,710)
Proceeds from issuance of common stock................... -- -- 20,000 20,000 2,197,500
Proceeds from convertible debt........................... -- -- 6,000,000 6,000,000 --
----------- ------------ ----------- ----------- -----------
Net cash provided by (used in) financing activities........ 6,587,114 (12,098,706) 5,674,984 2,555,252 10,311,785
----------- ------------ ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS......................................... 441,373 (889,450) 319,447 5,281,046 (477,079)
CASH ACQUIRED IN ACQUISITIONS.............................. -- -- 115,086 -- 80,404
CASH AND CASH EQUIVALENTS, beginning of year............... 831,265 1,272,638 383,188 383,188 817,721
----------- ------------ ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period................... $ 1,272,638 $ 383,188 $ 817,721 $ 5,664,234 $ 421,046
=========== ============ =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes........................................... $ 319,000 $ 230,000 $ -- $ -- $ --
=========== ============ =========== =========== ===========
Interest............................................... $ 570,000 $ 451,000 $ 692,066 $ 294,559 $ 320,545
=========== ============ =========== =========== ===========
NON-CASH FINANCING ACTIVITIES
Conversion of debt into common stock..................... $ -- $ -- $ 6,000,000 $ -- $ 250,000
=========== ============ =========== =========== ===========
Stock issued for acquisition........................... $ -- $ -- $ -- $ -- $ 172,500
=========== ============ =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 65
WAREFORCE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. LINE OF BUSINESS/SIGNIFICANT RISKS
Wareforce Incorporated (Wareforce) was incorporated in California in April
1985. In July 1998, Wareforce Incorporated entered into a transaction which was
accounted for as a reverse merger with Jolley Vending, Inc., a Nevada
corporation incorporated in June 1995. At the time of the transaction Jolley
Vending, Inc. was inactive. Jolley's assets and liabilities were nominal at the
date of the reverse merger. The transaction is accounted for as a reverse merger
acquisition, which results in a recapitalization of Wareforce in as much as it
is deemed to be the acquiring entity for accounting purposes. In June 1998,
Jolley Vending, Inc. changed its name to Wareforce One, Inc. and in January
1999, changed its name to Wareforce.com, Inc. (the Company). The Company is a
reseller of computer software, hardware, accessories, and peripherals and
provides related technical services.
During 1998, the Company concentrated on expanding its sales and developing
its administrative and sales infrastructure. As a result, at December 31, 1998,
the Company had a working capital deficit of $3,701,936 and a net loss of
$3,189,592 for the year ended December 31, 1998. To continue to progress on its
business plan, the Company plans to raise additional working capital through
private offerings of equity. Management believes that funds on hand, available
on line of credit and raised in private placements subsequent to year-end, will
be sufficient to fund its needs through at least December 31, 1999. There can be
no assurance that the Company will obtain sufficient funds to execute its
business plan or generate positive operating results. Subsequent to year-end,
the Company has raised $2,160,000 in private placements (see Note 14).
On August 31, 1998, the Company acquired 100 percent of the outstanding
common stock of C.Y. Investment, Inc. (CYI) for $3,000,000 cash. CYI is a
reseller of computers, accessories and services to businesses, the general
public and municipalities. The acquisition has been accounted for as a purchase
and the results of CYI have been included in the accompanying consolidated
financial statements since the date of the acquisition. The excess of the
purchase price over fair value of net assets acquired (goodwill) was $2,837,770
and is being amortized on a straight-line basis over seven years.
The purchase price was allocated as follows:
<TABLE>
<S> <C>
Cash........................................................ $ 115,086
Accounts receivable......................................... 8,810,702
Inventories................................................. 1,380,816
Other receivables........................................... 148,679
Property and equipment...................................... 56,024
Goodwill.................................................... 2,837,770
Other assets................................................ 28,643
Accounts payable............................................ (6,547,299)
Line of credit.............................................. (2,968,080)
Accrued expenses............................................ (862,341)
-----------
$ 3,000,000
===========
</TABLE>
F-8
<PAGE> 66
WAREFORCE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following unaudited pro forma consolidated results of operations have
been prepared as if the acquisition of CYI has occurred as of the beginning of
fiscal 1997 and 1998:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
1997 1998 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Net revenue................. $135,968,015 $133,376,335 $67,963,458
Net loss.................... $ (126,381) $ (3,379,119) $(1,470,682)
Net loss per basic common
share..................... $ (0.02) $ (0.40) $ (.21)
</TABLE>
On August 24, 1995, the Company acquired all of the outstanding common
stock of Los Angeles Micromart, Inc. (dba Personal Support Computers) (PSC) for
$220,000 cash. The acquisition was accounted for as a purchase. The purchase
price approximated the fair value of the net assets acquired, thus no goodwill
was recorded.
On November 25, 1996, as part of a plan to consolidate operations, the
Company sold certain assets and liabilities of PSC for approximately $300,000.
The net book value of the assets sold approximated the sales price. The
remaining net assets which are not expected to be recoverable amount to
$335,000, and a reserve has been recorded against the related assets and as an
element of cost of sales in 1996.
The Company also incurred in 1996 other expenditures which are nonrecurring
in nature and include $499,212 relating to a proposed offering, $200,000 for the
negotiated settlement of a lawsuit, and $335,000 to record the reserve for
certain assets of PSC.
The unaudited pro forma income from operations for the year ended December
31, 1996, excluding the nonrecurring expenses and the retail operations of
Personal Support Computers is as follows:
<TABLE>
<CAPTION>
NONRECURRING RETAIL PRO
DESCRIPTIONS AS REPORTED EXPENSES OPERATIONS FORMA
------------ ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Net revenues............. $88,509,770 $ -- $9,685,412 $78,824,358
Cost of sales............ 81,034,366 335,000 7,998,975 72,700,391
----------- ----------- ---------- -----------
Gross profit............. 7,475,404 (335,000) 1,686,437 6,123,967
Selling, general and
administrative......... 6,915,447 -- 1,924,259 4,991,188
Nonrecurring expenses.... 699,212 699,212 -- --
----------- ----------- ---------- -----------
(Loss) income from
operations............. $ (139,255) $(1,034,212) $ (237,822) $ 1,132,779
=========== =========== ========== ===========
</TABLE>
F-9
<PAGE> 67
WAREFORCE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
b. Cash and Cash Equivalents
Cash and cash equivalents includes cash and money market accounts which
funds may be deposited or withdrawn at any time without prior notice or penalty.
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. The carrying value of cash
equivalents approximates fair value.
c. Marketable Securities
The Company accounts for its marketable securities under Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Under this statement, the Company's
marketable securities, which consist principally of publicly traded equity
securities, are classified as available-for-sale. They are carried at fair
value, with the unrealized gains and losses, net of tax, reported as a separate
component of stockholders' equity. Realized gains and losses and declines in
value judged to be other-than-temporary, as well as interest and dividends, are
included in income in the accompanying consolidated statement of operations.
d. Concentration of Credit Risk
Accounts receivable represent unsecured balances due from its customers
with the Company at risk to the extent such amounts become uncollectible. The
Company performs credit evaluations of each of its customers and maintains
allowances for potential credit losses. Such losses have generally been within
management's expectations.
Revenues from the three largest customers, the four largest customers, and
the two largest customer were approximately 54 percent, 73 percent and 33
percent of net sales for the years ended December 31, 1996, 1997, and 1998,
respectively. Accounts receivable due from one customer accounted for 25
percent, 18 percent, and 11 percent of accounts receivable at December 31, 1996,
1997, and 1998, respectively.
During fiscal 1998, the Company lost certain significant customers. These
customers represented 31 percent and 8 percent of total revenues in 1997 and
1998, respectively. Management believes the Company will replace the lost
revenue with new customers.
e. Inventories
Inventories consist primarily of purchased computer software, hardware,
peripherals and accessories and are stated at the lower of cost or market; cost
is determined using the first-in, first-out method of accounting.
F-10
<PAGE> 68
WAREFORCE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
f. Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over five years. Leasehold improvements are amortized over
the period of the lease or the estimated useful life, whichever is shorter.
Expenditures for repairs and maintenance are charged to expense as incurred,
while improvements and betterments which prolong the useful life of the asset
are capitalized and depreciated over their estimated useful lives.
g. Goodwill
Goodwill represents purchase price in excess of the value of the tangible
net assets of companies acquired. In accordance with SFAS No. 121 "Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
Of", the Company periodically assesses the recoverability of the cost of its
goodwill based on a review of the projected undiscounted cash flows of the
related company.
h. Income Taxes
The Company accounts for income taxes pursuant to SFAS No. 109, "Accounting
for Income Taxes". Under SFAS 109, deferred income tax assets or liabilities are
computed based on the temporary difference between the financial statement and
income tax basis of assets and liabilities using the enacted marginal income tax
rate in effect for the year in which the differences are expected to reverse.
Deferred income tax expenses and credits are based on the changes in the
deferred income tax assets and liabilities from period to period.
i. Reverse Merger and Recapitalization
In connection with the reverse merger (see Note 1), the 2,750,000 common
stock outstanding of Wareforce Incorporated was exchanged at a rate of one share
of Wareforce Incorporated for 2.4625 shares of Jolley Vending, Inc. The
financial statements and earnings per share data have been retroactively
restated to reflect the post merger share amounts.
j. Use of Estimates
In the normal course of preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
k. Major Suppliers
The Company purchased approximately 92 percent and 80 percent of software,
hardware, accessories and peripherals from four suppliers in 1997 and 1998
respectively.
F-11
<PAGE> 69
WAREFORCE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Although purchases are concentrated with a few key suppliers, management
believes that other suppliers could provide similar services at comparable
prices. A change in certain suppliers, however, could cause a possible loss of
sales, which could adversely affect operating results.
l. Revenue Recognition
The Company records revenues upon shipment of merchandise or, if drop
shipped, upon notification from supplier that shipment has occurred. Revenues
from software site licenses are recorded when the initial copy of the software
is shipped to the customer or when the customer makes additional copies of the
licensed software. The Company records the corresponding payable to the software
manufacturer for site licenses when such revenues are recorded.
The company reserves for bad debt, warranties and product returns at the
time of sale, and such amounts are based upon historical experience.
m. Loss per Share
Basic loss per share in the accompanying financial statements is calculated
based on weighted average shares outstanding for the period without giving
effect to outstanding common stock equivalents, while diluted earnings per share
considers the effect of common stock equivalents on weighted average shares
outstanding.
Common share equivalents were not considered as they would be anti-dilutive
and had no impact on the loss per share for the fiscal years presented. However,
the impact under the treasury stock method of dilutive stock options and
warrants would have been 40,849 common shares for the year ended December 31,
1998. There were no dilutive stock options for the years ended December 31, 1996
or 1997.
n. New Authoritative Pronouncements
In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures About Segments on Enterprise and Related
Information." SFAS No. 130 establishes standards for reporting and display of
comprehensive income. SFAS No. 131 requires disclosure for each segment that is
similar to those required under current standards. SFAS 130 and SFAS 131 were
adopted for the year ending December 31, 1998 and did not have a material impact
on the Company's financial statements.
o. Advertising Costs
The Company expenses advertising costs as incurred.
Certain marketing and promotional expenditures are reimbursable by
suppliers under cooperative marketing and promotional fund agreements. Amounts
qualifying for reimbursement are recorded as a receivable from suppliers and as
a corresponding reduction in marketing expense in the period the expenditure
occurs.
F-12
<PAGE> 70
WAREFORCE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. MARKETABLE SECURITIES
The following is a summary of available-for-sale securities held by the
Company:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1996............... $791,790 $92,671 $(120,586) $763,875
December 31, 1997............... $124,525 $16,135 $ (50,876) $ 89,784
December 31, 1998............... $ 76,608 -- $ (34,718) $ 41,890
</TABLE>
The net realized gain (loss) on sales of available-for-sale securities
totaled $58,000, $(46,466), and $(30,629) in 1996, 1997, and 1998, respectively.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1998
---------- -----------
<S> <C> <C>
Automobiles.......................................... $ 70,354 $ 83,478
Equipment.......................................... 963,048 1,364,023
Furniture and fixtures............................. 207,596 291,713
Leasehold improvements............................. 205,556 406,861
---------- -----------
1,446,554 2,146,075
Less: accumulated depreciation and amortization.... (653,847) (1,018,580)
---------- -----------
$ 792,707 $ 1,127,495
========== ===========
</TABLE>
5. LINE OF CREDIT
During 1998, the Company entered into a new agreement with Congress
Financial Corporation (Congress) to provide for a $30,000,000 credit facility,
of which $18,000,000 has been allocated to Wareforce and $12,000,000 has been
allocated to CYI. $15,000,000 of the $30,000,000 is a revolving credit line and
the other $15,000,000 is to be used for inventory flooring plan. Advances under
the terms of the revolving credit line are limited to the sum of 85 percent of
eligible accounts receivable plus 75 percent of eligible inventory. Interest is
payable at Congress's prime rate (7.75 percent at December 31, 1998) and may be
raised to prime rate plus two percent under certain conditions and is subject to
certain covenants as defined in the agreement. The covenants were also amended
in March of 1999 effective December 31, 1998. As of December 31, 1998, the
Company is in compliance with the amended covenants. Advances under the
inventory flooring plan are based upon qualified inventory purchases and bear no
interest for 30 days, interest is charged at a rate of 1.5 percent per month for
payments made by the Company beyond the initial 30 day period. Typically, the
Company settles its advances under the inventory flooring plan within the 30 day
period. The facility is secured by substantially all of the Company's assets and
guaranteed by a majority stockholder in the amount of $1,500,000. Outstanding
borrowings under the revolving line of credit were $7,877,928 at December 31,
F-13
<PAGE> 71
WAREFORCE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1998. Outstanding borrowings under the inventory flooring plan were $3,045,486
as of December 31, 1998. Unused credit, subject to the terms of the related
agreement was $4,365,329 at December 31, 1998.
At December 31, 1997, the Company had a $15,000,000 credit facility with a
financial institution. The $15,000,000 revolving credit facility was comprised
of a $9,000,000 revolving credit line, a $5,000,000 inventory flooring plan and
a $1,000,000 term loan. Outstanding borrowings under the revolving line of
credit were $3,745,887. Outstanding borrowings under the floor plan line of
credit were $2,161,958 and no amounts were outstanding under the $1,000,000 term
loan as of December 31, 1997. The credit facility expired in August 1998 and was
refinanced with the Congress agreement, described above.
6. LONG-TERM DEBT
Long-term debt consists of the following as of December 31:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Note payable to bank, secured by vehicle, principal and
interest payments of $312 per month through April 1999,
interest at 7.5 percent per annum......................... $ 4,538 $ 1,022
Note payable to bank, secured by $27,000 certificate of
deposits, principal payments of $530 per month through
December 2000 interest at 7.5 percent per annum........... 17,049 11,788
------- -------
$21,587 $12,810
======= =======
</TABLE>
Maturities of long-term debt for the year ended December 31, are as
follows:
<TABLE>
<S> <C>
1999.................................................. $ 6,637
2000.................................................. 6,173
-------
$12,810
=======
</TABLE>
7. CONVERTIBLE DEBT
In March and April 1998, the Company issued in aggregate $6,000,000 of 12
percent convertible debentures, maturing one year from the date of issuance with
an option to renew for an additional year. The Company paid a commission plus
expenses of $810,310 to a third party in connection with raising these funds.
Interest is payable monthly. During June 1998, the $6,000,000 was converted into
1,999,997 shares of the Company's common stock.
F-14
<PAGE> 72
WAREFORCE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMON STOCK
During April 1998, the Company issued options to purchase 253,120 shares of
common stock to officers at approximately $0.49 per share for past services
performed. During April 1998, the officers exercised the options. The officers
were not required to pay the exercise price. Therefore, $124,376 was recorded as
compensation expense in the accompanying consolidated financial statements.
In June 1998, prior to the reverse merger, 1,110,000 shares were
outstanding of Jolley Vending, Inc. The former stockholders of Jolley Vending,
Inc. were issued 1,110,000 Series A warrants and 1,110,000 Series B warrants to
purchase common stock at $13.00 per share and $15.00 respectively. The warrants
were exercisable upon filing a registration statement with the Securities and
Exchange Commission. This registration statement has not been filed. In December
1998, the Series A warrants and Series B warrants were re-priced at $6.00 per
share and $7.00 per share, respectively. The difference between the fair value
of the warrants as of the date of the re-pricing and the initial issuance is
$3,429,000 and is recorded in stockholders' equity in the accompanying
consolidated financial statements. The warrants were valued using the
Black-Scholes option pricing model using the following weighted average
assumptions: 0 dividend yield, expected volatility of 86 percent, weighted
average risk-free interest rate of 5.0 percent and expected life of three years.
During December 1998, an employee exercised options to purchase 5,000
shares of common stock at $4.00. As of December 31, 1998, the shares were not
issued and are included in stock subscriptions. These shares were issued in
January 1999.
9. STOCK OPTION PLAN
During 1998 the Board approved the Wareforce.com, Inc. 1998 Stock
Option/Stock Issuance Plan (the 1998 Plan) as a successor to the 1996 Plan. No
options were outstanding under the 1996 plan. The Plan has three separate equity
programs: the discretionary option grant program, the stock issuance program and
the automatic option grant program. As part of the 1998 Plan, the number of
common stock available for issuance is 1,000,000 shares subject to increases per
year of one percent of the common stock outstanding on December 31 of the
preceding year. Incentive stock options will be granted at a price that is not
less than 100 percent of fair value of the stock at the date of grant, and
non-qualified stock options will be granted at a price that is not less than 85
percent of fair value of the stock at the date of grant. Options vest as
determined by the plan administrator and are generally exercisable over a period
not to exceed ten years. As of December 31, 1998, the Company had granted an
aggregate of 417,859 options under the 1998 Plan at exercise prices ranging from
$2.75 to $5.13 per share which vest over four years from the date of grant.
F-15
<PAGE> 73
WAREFORCE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The number of options and weighted-average exercise prices of options for
each of the following groups of options, for the periods indicated, are as
follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICES
--------- ----------------
<S> <C> <C>
Options outstanding at December 31, 1997..... -- $ --
Granted.................................... 670,979 $2.49
Exercised.................................. 258,120 $0.56
Cancelled.................................. 8,750 $3.34
Options outstanding at December 31, 1998..... 404,109 $3.73
Exercisable at December 31, 1998............. 55,859 $5.00
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
WEIGHTED-AVERAGE NUMBER OF OPTIONS REMAINING NUMBER OF SHARES
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
- ---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
3.03.$..... 255,000 9.6 years --
4.94.$..... 149,109 9.7 years 55,859
</TABLE>
The Company accounts for grants under the 1998 Plan under APB No. 25 and,
accordingly, no compensation costs have been recognized in the accompanying
consolidated statements of operations. If compensation costs for the 1998 Plan
had been determined under SFAS No. 123, pro forma net loss would have been as
follows:
<TABLE>
<S> <C>
Net loss as reported...................................... $(3,189,592)
Net loss pro forma........................................ $(3,400,192)
Basic and diluted loss per share as reported.............. $ (0.38)
Basic and diluted loss per share pro forma................ $ (0.40)
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
ASSUMPTIONS FOR OPTION
GRANT
----------------------
<S> <C>
Dividend Yield............................................. None
Expected Volatility........................................ 86 percent
Weighted Average Risk-Free Interest Rate................... 5.22 percent
Expected Lives............................................. 5 years
Weighted-Average Fair Value of Options Granted............. $2.64
</TABLE>
F-16
<PAGE> 74
WAREFORCE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES
The (benefit) provision for income taxes is as follows as of December 31:
<TABLE>
<CAPTION>
1996 1997 1998
--------- ------- ---------
<S> <C> <C> <C>
Current:
Federal.................................... $ 106,283 $14,700 $ --
State...................................... 42,555 6,800 2,400
Deferred:
Federal.................................... (243,051) (60) (590,669)
State...................................... (81,789) -- (183,000)
--------- ------- ---------
$(176,002) $21,440 $(771,269)
========= ======= =========
</TABLE>
The deferred income tax assets consist of the tax effect of temporary
differences related to the following components as of December 31:
<TABLE>
<CAPTION>
1997 1998
-------- -----------
<S> <C> <C>
Deferred tax assets:
Inventory reserves................................... $281,500 $ 138,000
Allowance for bad debts.............................. 87,800 180,200
Other accruals....................................... 14,900 115,300
Net operating loss carryforward...................... -- 1,426,000
-------- -----------
384,200 1,859,500
Valuation allowance.................................. (108,300) (1,228,500)
-------- -----------
Total deferred tax assets.................... $275,900 $ 631,000
======== ===========
</TABLE>
As of December 31, 1998, the Company had a Federal net operating loss
carryforward of approximately $3,974,000, which will expire in fiscal years
ending 2018. A reconciliation of the provision for income taxes to the amount
computed at the Federal statutory rate is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Federal income tax benefit (provision) at the statutory
rate................................................... 34% (31)% 34%
State taxes, net of federal income tax effect............ 6% (9)% 4%
Provision for net operating loss carryforward............ -- -- (28)%
Tax refund claims and other items, net................... (12)% 14% 9%
--- --- ---
28% (26)% 19%
=== === ===
</TABLE>
The Company establishes valuation allowances in accordance with SFAS 109.
The Company continually reviews the adequacy of the valuation allowance and is
recognizing these benefits only as reassessment indicates it is more likely than
not that the benefits will be realized.
F-17
<PAGE> 75
WAREFORCE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. RELATED PARTY TRANSACTION
The Company has various notes due from a majority Shareholder totaling
$2,457,700. These notes include $2,000,000 advanced to this Shareholder to
purchase 3,358,938 shares of common stock from the former majority Shareholder
in February 1998. The notes are due in varying amounts from December 2000 to
December 2008 and bear interest at rates from 5.83 percent to 6.48 percent and
are pledged as collateral for the line of credit. Included in notes receivable
and advances to stockholder is approximately $128,000 of accrued interest as of
December 31, 1998. In addition, the Company has made advances to this
Shareholder. Total advances without a promissory note are $789,900 as of
December 31, 1998. The Shareholder plans to repay these advances beginning in
fiscal year 2000 through 2008.
A stockholder of the Company owns the Company's distribution facility, to
which the Company made rental payments of $10,200 per month to the stockholder
for a total of $122,400 for each of 1996 and 1997, and $81,600 in 1998. In
September 1998 the Company moved to a new distribution facility.
12. EMPLOYEE PROFIT SHARING PLAN
Effective January 1, 1993, the Company adopted a noncontributory Employee
Profit Sharing Plan (the Plan). The Plan covers all employees who are 21 years
of age or older and have one or more years of service as of June 1, 1993.
Company contributions to the Plan are voluntary and at the discretion of the
Board of Directors.
In 1996, the Company amended the Plan to include the Company's 401(k)
Profit Sharing Plan (the 401(k) Plan) which was formed on January 1, 1996. Under
the 401(k) Plan, eligible employees can defer up to 10% of their salary, subject
to certain limitations, and the Company, at its discretion, may make a matching
contribution equal to a percentage of the deferred salary elected by employees.
Contributions made by the Company to both plans totaled $6,135 in 1998. There
were no contributions made by the Company to either plan in 1997 or 1996.
13. COMMITMENTS
a. Operating Leases
The Company leases facilities under non-cancelable operating leases
expiring through January 2005. The lease agreements provide for periodic cost of
living adjustments based upon changes in the Consumer Price Index. Rent expense
recorded by the Company totaled approximately $285,000, $366,000, and $551,000
during 1996, 1997, and 1998, respectively.
F-18
<PAGE> 76
WAREFORCE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Minimum lease payments for the years ending December 31, are as follows:
<TABLE>
<S> <C>
1999............................................... $ 621,878
2000............................................... 496,969
2001............................................... 442,303
2002............................................... 442,303
2003............................................... 337,034
Thereafter......................................... 318,078
----------
$2,658,565
==========
</TABLE>
b. Employment Contracts
The Company has employment agreements with five of its executive officers,
which expire through August 2001. These agreements provide for minimum salary
levels, as well as for incentive bonuses that are payable if specified
management goals are attained. The aggregate commitment for future salaries at
December 31, 1998, excluding bonuses, was approximately $1,976,000.
14. SUBSEQUENT EVENTS
a. Common Stock
In January 1999, the Company sold in aggregate 600,000 shares of common
stock in a private placement at an issue price of $4.00 per share for net
proceeds of $2,150,000.
b. Acquisitions
In March 1999, we purchased certain assets and liabilities of Kennsco, Inc.
for $1,000,000. The purchase price was paid $750,000 cash and $250,000 by means
of a promissory note due in September 1999, payable in shares of the Company's
common stock as defined in the agreement. Kennsco is a Minneapolis,
Minnesota-based technical services company.
In February 1999, the Company entered into a letter of intent to purchase
70 percent of the outstanding stock of uMember.com a private online auction
company, a start up organization incorporated on January 28, 1999. In connection
with the proposed purchase, the Company is required to fund $1,000,000 of
uMember.com's operations and also issue 30,000 restricted shares of the
Company's common stock to the owners of uMember.com. The restricted shares were
issued April 22, 1999.
15. INFORMATION RELATED TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PRESENTATION
The unaudited financial statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and note disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to those
F-19
<PAGE> 77
WAREFORCE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
rules and regulations, although the Company believes that the disclosures made
are adequate to make the information presented not misleading. These unaudited
financial statements reflect, in the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to fairly present
the results of operations, changes in cash flows and financial position as of
and for the periods presented. These unaudited financial statements should be
read in conjunction with the audited financial statements and related noted
thereto, appearing elsewhere herein. The results for the interim periods
presented are not necessarily indicative of results to be expected for a full
year.
Acquisition
The purchase price of Kennsco was allocated as follows:
<TABLE>
<S> <C>
Cash............................................... $ 80,404
Accounts Receivable................................ 1,269,655
Inventories........................................ 491,210
Net Investment in Sales Type Leases................ 1,269,797
Property & Equipment............................... 444,097
Goodwill........................................... 1,820,936
Other Assets....................................... 70,195
Accounts Payable................................... (1,184,888)
Line of Credit..................................... (877,580)
Accrued Expenses................................... (410,570)
Long Term Debt..................................... (1,801,550)
Customer Deposits.................................. (171,706)
----------
$1,000,000
</TABLE>
The following unaudited proforma consolidated results of operations have
been prepared as if the acquisition of Kennsco had occurred as of the beginning
of fiscal 1998 and 1999, the 1999 data is for six months ended:
<TABLE>
<CAPTION>
CONSOLIDATED CONSOLIDATED
PROFORMA PROFOMA
12/31/98 6/30/99
------------ ------------
<S> <C> <C>
Net Revenues....................................... $108,134,580 $74,978,066
Cost of Goods Sold................................. 93,614,635 65,421,561
------------ -----------
Gross Profit....................................... 14,519,945 9,556,505
Selling, General and Administrative................ 16,785,940 9,393,049
------------ -----------
(Loss) Income From Operations...................... (2,265,995) 163,456
Interest Expense, Net.............................. 868,033 382,545
Other Income (Expense)............................. (1,067,564) (68,209)
------------ -----------
Loss Before Income Taxes........................... (4,201,592) (287,298)
Benefit for Income Taxes........................... (771,269) --
Net Loss........................................... $ (3,430,323) $ (287,298)
============ ===========
Basic and Diluted (Loss) Earnings per Share........ $ (0.40) $ (0.03)
Weighted Average Number of Common Shares
Outstanding...................................... 8,542,569 10,720,606
</TABLE>
F-20
<PAGE> 78
WAREFORCE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
uMember Stock Split
In July 1999, uMember filed to change its Articles of Incorporation to
split its stock 5-to-1, increasing outstanding common stock from one million
shares to five million shares and authorized common stock from ten million to 50
million shares.
The Company verbally agreed to a joint venture agreement as part of a
two-step process to acquire privately held CampaNova Gmbtt of Frankfurt,
Germany. CampaNova provides business-to-business and business-to-consumer
E-commerce solutions to the German market. The Company expects the purchase to
be complete in late 1999. The Company is currently conducting due diligence on
CampaNova and are also in negotiations over the terms of a deal, should one
occur. CampaNova's business is still development-phase. They have assets of
approximately $75,000 and expect to have revenues of approximately $150,000 for
fiscal 1999. They have, since start-up, operated at a loss.
Wareforce Incorporated and CY Investment Inc. plan to merge effective
September 30, 1999. The combined company will be known as Wareforce
Incorporated. The combined company will also do business as Impress Technology,
Advanced Optical Distribution and Kennsco.
Sales Type Leases
The present value of the minimum lease payments receivable and guaranteed
residual value are recorded as equipment sales-leasing at the inception of the
lease with a corresponding net investment in sales-type leases. The cost of
equipment less the present value of the estimated unguaranteed residual value is
recorded as cost of equipment sales-leasing.
F-21
<PAGE> 79
WAREFORCE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Long Term Debt
Long term debt consist of the following as of June 30, 1999:
<TABLE>
<S> <C>
Sales type leases with several leasing companies with
varying monthly payments through June, 2002 with varying
interest rates from 8 to 9.56 percent per annum.......... $1,052,558
A note payable to an officer in 13 quarterly installments
starting July 1999 of principal and interest, at the
bank's prime rate of interest charged to Wareforce....... 240,762
Note payable to Fidelity Bank for inventory that is due
March 31, 2000, payable in 12 monthly installments of
$39,455.28, which includes principal and interest at the
current rate of 10.25 percent per year, beginning April
1, 1999.................................................. 339,751
Other...................................................... 8,982
----------
Total long term debt....................................... 1,642,053
==========
Current portion............................................ 928,006
----------
Long term portion.......................................... $ 714,047
==========
</TABLE>
Employment Agreements
In connection with the Kennsco acquisition, the Company entered into an
employment agreement with one of Kennsco's officers, which expires in May 2002.
Conversion of Note Payable
On May 29, 1999 the promissory note issued as part of the Kennsco purchase
price was converted into 51,948 shares of the Company's common stock. The number
of shares was arrived at by dividing the $250,000 note by $4.825 the price of
the Company's shares at closing on the day prior to conversion.
Line of Credit
The agreement previously mentioned in Footnote 5, with Congress Financial
Corporation was amended in March 1999 to include Kennsco and provide a
$2,000,000 revolving sub-facility under the same terms as the original loan
agreement. At June 30, 1999, $645,400 was outstanding by Kennsco.
As of June 30, 1999, $12,285,376 was outstanding under the line of credit
and $7,819,919 was outstanding under the inventory flooring plan.
Warrants
In June 1999 Wareforce.com engaged in services of an investment relations
firm. Part of their compensation is 50,000 stock purchase warrants. These
warrants are convertible into 50,000 shares exercisable at $7.00 per share. The
warrants are contingent upon meeting stock price and volume targets as defined
in the engagement agreement. As of
F-22
<PAGE> 80
WAREFORCE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 none of these targets were met. If the targets are met during the
term of the engagement and the warrants are issued, they will vest immediately
and expire 1.5 years from the date of issue.
uMember Options
Subsequent to the acquisition of uMember, the Company has issued options to
purchase 134,400 shares of uMember common stock, at an exercise price of $.025
per share. As of June 30, 1999, 107,000 of the uMember options were exercisable.
F-23
<PAGE> 81
C.Y. INVESTMENT INC.
(DBA MICROAGE/IMPRES TECHNOLOGY)
INDEX TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
TOGETHER WITH AUDITORS' REPORT
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Public Accountants.................... F-25
Balance Sheets.............................................. F-26
Statements of Operations.................................... F-27
Statements of Stockholders' Equity.......................... F-28
Statements of Cash Flows.................................... F-29
Notes to Financial Statements............................... F-30
</TABLE>
F-24
<PAGE> 82
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
C.Y. INVESTMENT INC. (DBA MICROAGE/IMPRES TECHNOLOGY):
We have audited the accompanying balance sheets of C.Y. INVESTMENT INC.
(dba MICROAGE/IMPRESS TECHNOLOGY) (a California corporation) as of December 31,
1997 and 1996 and the related statements of operations, stockholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to expressed
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of C.Y. INVESTMENT INC. as of
December 31, 1997 and 1996, and the results of its cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Los Angeles, California
October 22, 1998
F-25
<PAGE> 83
C.Y. INVESTMENT INC.
(DBA MICROAGE/IMPRES TECHNOLOGY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SIX MONTHS ENDED
1996 1997 JUNE 30, 1998
---------- ----------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................ $ 96,879 $ 380,095 $ 363,657
Accounts receivable, net of
allowance of $174,000 and $55,000
at December 31, 1997 and 1996 and
$236,000 at June 30, 1998,
respectively..................... 4,591,164 11,080,181 9,121,528
Other receivables................... 79,217 404,928 --
Inventories......................... 749,463 1,260,653 1,335,042
Prepaid expenses.................... 34,800 11,401 74,184
Income taxes receivable............. 27,000 -- --
---------- ----------- -----------
Total current assets........... 5,578,523 13,137,258 10,894,411
---------- ----------- -----------
PROPERTY AND EQUIPMENT, net........... 80,822 76,081 63,176
---------- ----------- -----------
OTHER ASSETS.......................... 104,512 111,896 44,139
---------- ----------- -----------
$5,763,857 $13,325,235 $11,001,726
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit..................... $3,168,460 $ 8,962,692 $ 6,333,807
Accounts payable.................... 1,375,902 2,697,966 3,581,989
Accrued liabilities................. 510,517 1,029,560 555,173
Income taxes payable................ -- 114,000 --
---------- ----------- -----------
Total current liabilities...... 5,054,879 12,804,218 10,470,969
---------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Common stock, no par value:
Authorized -- 1,000,000 shares
Issued and outstanding -- 410,000
shares......................... 410,000 410,000 410,000
Additional paid in capital.......... 212,751 212,751 212,751
(Accumulated deficit) retained
earnings......................... 86,227 (101,734) (91,994)
---------- ----------- -----------
Total stockholders' equity..... 708,978 521,017 530,757
---------- ----------- -----------
$5,763,857 $13,325,235 $11,001,726
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-26
<PAGE> 84
C.Y. INVESTMENT INC.
(DBA MICROAGE/IMPRES TECHNOLOGY)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SIX MONTHS ENDED
1996 1997 JUNE 30, 1998
----------- ----------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
NET REVENUES......................... $37,335,006 $56,346,303 $33,040,725
COST OF SALES........................ 34,032,282 50,457,421 29,523,251
----------- ----------- -----------
Gross profit.................... 3,302,724 5,888,882 3,517,474
SELLING, GENERAL AND
ADMINISTRATIVE..................... 3,223,361 5,541,887 3,313,366
----------- ----------- -----------
Income from operations.......... 79,363 346,995 204,108
OTHER INCOME (EXPENSE):
Other income....................... 7,093 9,948
Interest expense................... (122,184) (363,904) (188,068)
----------- ----------- -----------
(115,091) (353,956) (188,068)
----------- ----------- -----------
Net (loss) income before
provision for income taxes.... (35,728) (6,961) 16,040
PROVISION FOR INCOME TAXES........... (4,000) (181,000) 6,300
----------- ----------- -----------
NET (LOSS) INCOME.................... $ (39,728) $ (187,961) $ 9,740
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE> 85
C.Y. INVESTMENT INC.
(DBA MICROAGE/IMPRES TECHNOLOGY)
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(ACCUMULATED
COMMON STOCK ADDITIONAL DEFICIT)
------------------ PAID IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------- -------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1995...................... 410,000 $410,000 $212,751 $ 125,955 $ 748,706
Net loss.................. -- -- -- (39,728) (39,728)
------- -------- -------- --------- ---------
Balance, December 31,
1996...................... 410,000 410,000 212,751 86,227 708,978
Net loss.................. -- -- -- (187,961) (187,961)
------- -------- -------- --------- ---------
Balance, December 31,
1997...................... 410,000 410,000 212,751 (101,734) 521,017
------- -------- -------- --------- ---------
Net income.................. -- -- -- 9,740 9,740
Balance, June 30, 1998
(unaudited)............... 410,000 $410,000 $212,751 $ (91,994) $ 530,757
======= ======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE> 86
C.Y. INVESTMENT INC.
(DBA MICROAGE/IMPRES TECHNOLOGY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
DECEMBER 31, ENDED
------------------------- JUNE 30,
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income............................... $ (39,728) $ (187,961) $ 9,740
Adjustments to reconcile net loss to net cash
used in operating activities:
Compensation expense for options issued.... 22,200 25,800 --
Depreciation and amortization.............. 38,158 55,789 22,937
Provision for doubtful accounts............ 55,000 219,000 --
Deferred income tax asset.................. 31,000 -- --
Change in operating assets and liabilities:
Accounts receivable........................ (1,983,924) (6,708,017) 1,958,653
Inventories................................ (223,653) (511,190) (74,389)
Prepaid expenses and other receivables..... (59,830) (302,312) 342,145
Other assets............................... (5,802) (2,032) 67,757
Income taxes receivable.................... (27,000) 27,000 --
Accounts payable........................... 808,734 1,322,064 884,023
Accrued liabilities........................ 124,142 493,243 (474,387)
Income taxes payable....................... -- 114,000 (114,000)
----------- ----------- -----------
Net cash used in operating activities.... (1,260,703) (5,454,616) 2,622,479
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............. (9,867) (43,903) (10,032)
Increase in cash surrender value................ (10,371) (12,497) --
----------- ----------- -----------
Net cash used in investing activities.... (20,238) (56,400) (10,032)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings lines of credit.................. 1,213,945 5,794,232 (2,628,885)
----------- ----------- -----------
INCREASE/(DECREASE) IN CASH....................... (66,996) 283,216 (16,438)
CASH, beginning of year........................... 163,875 96,879 380,095
----------- ----------- -----------
CASH, end of year................................. $ 96,879 $ 380,095 $ 363,657
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes.................................. $ 9,000 $ 21,000 $ 0
=========== =========== ===========
Interest...................................... $ 127,000 $ 322,000 $ 188,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE> 87
C.Y. INVESTMENT INC.
(DBA MICROAGE/IMPRES TECHNOLOGY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. LINE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Line of Business
C.Y. INVESTMENT INC. (the Company) was incorporated in California in June
1988. The Company is a franchised computer store, which sells computers,
accessories and services to businesses, the general public and municipalities.
The Company has three locations in Southern California.
On July 1, 1987, the Company entered into a ten-year franchise agreement
with Microage Computer Store, Inc., an Arizona Corporation. The agreement was
revised in January 1, 1990 and the period of the agreement remained at ten years
starting on the date of this revised agreement. Under the Agreement, the Company
has the non-exclusive franchise to operate a Microage Computer Store. The
agreements restrict the transfer of the Company's stock and contain non-compete
covenants. Subsequent to year-end this agreement was terminated upon the sale of
the Company to Wareforce One, Inc. (Note 8).
b. Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities and
disclosure of contingencies at the date of the financial statements, as well as
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
c. Sales and Concentration of Credit Risk
The Company sells computer software, hardware, peripherals and accessories
to governmental and private customers. The Company performs periodic credit
evaluations of its customers. The Company maintains reserves for potential
credit losses and to date such losses have been within management's
expectations. As of December 31, 1997 one customer's balance was approximately
20 percent of total accounts receivable. As of December 31, 1996 two customer's
balances combined were approximately 32 percent of total accounts receivable.
d. Revenue Recognition
Product revenue is recorded at the time of shipment, net of estimated
allowances for bad debts, warranty and product returns. Revenues from software
site licenses are recorded when the initial copy of the software is shipped to
the customer or when the customer issues a purchase order to make additional
copies of licensed software. The Company records the corresponding payable to
the software vendor for site licenses when such revenues are recorded.
F-30
<PAGE> 88
C.Y. INVESTMENT INC.
(DBA MICROAGE/IMPRES TECHNOLOGY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
e. Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out (FIFO) method.
f. Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over estimated lives of three to five years. Leasehold
improvements are amortized on a straight-line basis over the lesser of the life
of the asset or the remaining life of the lease.
The Company capitalizes expenditures which materially increase asset lives
and charges ordinary repairs and maintenance to operations as incurred. When
assets are sold or otherwise disposed of, the cost and related reserves are
removed from the accounts and any resulting gain or loss is included in
operations.
g. Advertising Costs
The Company expenses advertising costs as incurred. Advertising expenses
totaled approximately $198,000 and $43,000 in 1997 and 1996, respectively.
Certain marketing and promotional expenditures are reimbursable by suppliers
under cooperative marketing and promotional fund agreements. Amounts qualifying
for reimbursement are recorded as a receivable from suppliers and as a
corresponding reduction in marketing expense in the period the expenditure
occurs.
h. Income Taxes
Income taxes are accounted for using the liability method in accordance
with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." Under this method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Equipment........................................ $197,768 $172,975
Office furniture and fixtures.................... 139,854 130,525
Leasehold improvements........................... 109,346 99,565
-------- --------
446,968 403,065
Less -- Accumulated depreciation and
amortization................................... 370,887 322,243
-------- --------
$ 76,081 $ 80,822
======== ========
</TABLE>
F-31
<PAGE> 89
C.Y. INVESTMENT INC.
(DBA MICROAGE/IMPRES TECHNOLOGY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
3. LINES OF CREDIT
The Company has a $250,000 line of credit with a vendor. The vendor
advances on the credit line for purchases of inventory. Advances under the line
of credit are based upon qualified inventory and bear no interest for the first
30 days, an interest rate of prime (8.5 percent as of December 31, 1997) plus
6.5 percent is charged on amounts outstanding longer than 30 days. The credit
line is secured by all inventories and is guaranteed by certain shareholders.
This agreement shall be in force until one of the parties gives notice to the
other that it is terminated. As of December 31, 1997 and 1996, outstanding
balances under this line were $13,674 and $24,671, respectively.
The Company has a $750,000 line of credit, subject to agreed upon temporary
uplifts, with a finance company for the purchase of inventory. The repayment
terms are net 30. The line of credit bears interest of 18 percent on amounts
outstanding longer than 60 days. The credit line is secured by substantially all
eligible inventories and is guaranteed by certain shareholders. As of December
31, 1997 and 1996, outstanding balances under this line were $378,762 and
$189,997, respectively.
As of December 31, 1997, the Company has a $6,750,000 accounts receivable
line of credit with a finance company. The availability of this line of credit
was reduced to $4,500,000 in February 1998. The advances are subject to a
borrowing base computation on eligible accounts receivable. The line is secured
by substantially all of the assets of the Company and is guaranteed by certain
shareholders. Interest is payable monthly on the outstanding principal at prime
plus 0.5 percent. This temporary overline expired in February 2, 1998. As of
December 31, 1997, and 1996, the Company had exceeded its accounts receivable
facility by $122,948. As of December 31, 1997, outstanding balances under this
line were $6,872,948 and $1,364,011, respectively.
The Company has a $3,250,000 line of credit with a finance company for the
purchase of inventory. The line is secured by substantially all of the assets of
the Company and is guaranteed by certain shareholders. Advances under the line
of credit bear no interest for 40 days, thereafter, interest is at prime plus
0.5 percent. As of September 30, 1997, the Company was approved a temporary
increase to $4,875,000. This temporary increase expired on January 31, 1998. As
of December 31, 1997 and 1996 outstanding balances under this line were
$1,447,308 and $1,589,781, respectively.
The Company has a $250,000 revolving line of credit. The line is secured by
substantially all the assets of the Company and is guaranteed by a shareholder.
The line expires March 23, 1999 renewable annually. Interest on advances is
charged at the Bank's Prime rate plus 2 percent. At December 31, 1997 and 1996,
outstanding balances under the line of credit were $250,000 and $0,
respectively.
Subsequent to year-end, all of the above lines of credit were refinanced
with a financing company (Note 8).
F-32
<PAGE> 90
C.Y. INVESTMENT INC.
(DBA MICROAGE/IMPRES TECHNOLOGY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
4. INCOME TAXES
Under SFAS No. 109, deferred tax assets or liabilities are computed based
on the temporary differences between financial statement and income tax basis of
assets and liabilities using the enacted marginal income tax rate in effect for
the year in which the differences are expected to reverse.
Valuation allowances have been established to reduce deferred tax assets to
the amount anticipated to be realized. Income tax expense is the tax payable for
the period and the change in deferred tax assets and liabilities during the
period.
The components of the net deferred income tax asset are as follows as of
December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Allowance for doubtful accounts................ $ 75,000 $ 24,000
Inventory reserves............................. 131,000 72,000
Accrued expenses............................... 44,000 59,000
--------- ---------
Net short-term deferred tax asset............ 250,000 155,000
Depreciation and amortization.................. 26,000 24,000
--------- ---------
Long-term deferred tax asset................. 26,000 24,000
Valuation allowance............................ (276,000) (179,000)
--------- ---------
Net deferred tax asset......................... $ -- $ --
========= =========
</TABLE>
The provision for income taxes is comprised of the following components as
of December 31:
<TABLE>
<CAPTION>
1997 1996
-------- ------
<S> <C> <C>
Current:
Federal....................................... $123,000 $3,000
State......................................... 35,000 1,000
-------- ------
158,000 4,000
-------- ------
Deferred:
Federal....................................... 17,000 --
State......................................... 6,000 --
-------- ------
23,000 --
-------- ------
Provision for income taxes...................... $181,000 $4,000
======== ======
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
a. Deferred Compensation Plan
The Company entered into a deferred compensation plan in 1989 for the
benefit of an employee. The benefit payable under the plan consists of monthly
payment of $3,000 commencing on a date determined by the Company but within six
months from such
F-33
<PAGE> 91
C.Y. INVESTMENT INC.
(DBA MICROAGE/IMPRES TECHNOLOGY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
retirement date, November 1, 1999 and continuing for 36 months. If the employee
dies before retirement age while in the employment of the Company, the benefits
payable to the beneficiary will be $100,000. As of December 31, 1997 and 1996,
the Company has accrued $47,327 and $36,352, respectively, under this agreement.
The Company is funding the deferred compensation plan with a life insurance
policy on the employee with a face value of $130,000. The cash value of the
policy was $64,184 and $51,687 as of December 31, 1997 and 1996, respectively,
and is included in other assets in the accompanying balance sheets.
b. Leases
The Company leases facilities under non-cancelable operating leases
expiring through December 2000. Total minimum operating lease commitments are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING OFFICES AND
DECEMBER 31, WAREHOUSES
------------ -----------
<S> <C>
1998............................................... $274,839
1999............................................... 188,003
2000............................................... 63,683
--------
$526,525
========
</TABLE>
Rental expense was $293,746 and $218,442 for the years ended December 31,
1997 and 1996, respectively.
The Company also subleased part of the warehouse facilities to Battery
Technology Inc. under an operating lease that will expire in December of 2000.
Total rental income was $93,443 and $81,400 for the year ended December 31, 1997
and 1996, respectively.
6. RELATED PARTY TRANSACTIONS
A majority stockholder of the Company also has an interest in Battery
Technology Inc. (BTI), a California corporation. Total sales to and purchases
from BTI were $22,071 and $152,174, respectively, for the year ended December
31, 1997. Total sales to BTI was approximately $42,000 for the year ended
December 31, 1996. There was $438 outstanding balance due from BTI and
approximately $2,395 due to BTI as of December 31, 1997. There was a $22,803
outstanding balance due from BTI as of December 31, 1996. The Company also
subleases office space to BTI (see Note 5).
A majority stockholder of the Company has a minority interest in Protect
Investment Inc., d.b.a.: Microage Industry, a California corporation. Total
sales to and purchases from Protec Investment Inc. were $459,146 and $53,571
respectively, for the year ended December 31, 1997. As of December 31, 1997,
$23,753 was due from and $2,439 was due to Protec Investment Inc. There were no
sales, purchases or amounts due to or from Protec Investment Inc. for the year
ended December 31, 1996.
F-34
<PAGE> 92
C.Y. INVESTMENT INC.
(DBA MICROAGE/IMPRES TECHNOLOGY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
7. EMPLOYMENT AGREEMENT
The Company has an employment agreement with a stockholder. Under the
agreement the employee received an option to purchase shares of the Company for
$100 for each one percent of the common stock up to 20 percent. The options vest
over the term of the agreement. If ownership in the Company is transferred or
sold, the entire 20 percent option becomes vested. The Company recognized
$25,800 and $22,200 of expense in 1997 and 1996, respectively, and included in
accrued liabilities is $140,600 and $114,800 related to this agreement for 1997
and 1996, respectively.
8. SUBSEQUENT EVENTS
a. Lines of Credit
On August 27, 1998, the Company entered into a new agreement with a finance
company to provide for a $12,000,000 credit facility of which $7,000,000 can be
used for inventory flooring, which replaces the previous credit facilities (Note
3). Advances under the terms of the agreement are limited to the sum of 85
percent of eligible accounts receivable plus 75 percent of eligible inventory.
Interest is payable at the finance company's prime rate and may be raised to
prime rate plus two percent under certain conditions and is subject to certain
covenants as defined in the agreement. The facility is secured by substantially
all of the Company's assets and guaranteed by a stockholder.
b. Sale of Company
On August 31, 1998, 100 percent of the outstanding stock of the Company was
purchased by Wareforce One, Inc. for $3,000,000.
F-35
<PAGE> 93
KENNSCO, INC. AND SUBSIDIARY
PLYMOUTH, MINNESOTA
CONSOLIDATED FINANCIAL REPORT
JUNE 30, 1998
F-36
<PAGE> 94
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITORS' REPORT................................ F-38
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets............................... F-39
Consolidated statements of operations and retained
earnings (deficit)..................................... F-40
Consolidated statements of cash flows..................... F-41
Notes to consolidated financial statements................ F-42
</TABLE>
F-37
<PAGE> 95
INDEPENDENT AUDITORS' REPORT
To The Board of Directors
Kennsco, Inc.
Plymouth, Minnesota
We have audited the accompanying consolidated balance sheets of Kennsco,
Inc. and subsidiary as of June 30, 1998 and 1997, and the related consolidated
statements of operations and retained earnings (deficit) and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the
first paragraph present fairly, in all material respects, the financial position
of Kennsco, Inc. and subsidiary as of June 30, 1998 and 1997, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
As discussed in Note 10 to the financial statements, on March 22, 1999, the
Company sold its assets to a third party.
/s/ Boyum & Barenscheer PLLP
Minneapolis, Minnesota
January 20, 1999, (except for Note 10,
to which the date is March 22, 1999)
F-38
<PAGE> 96
KENNSCO, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
CASH...................................................... $ -- $ 138,366
RECEIVABLES
Accounts receivable, trade, less allowance for doubtful
accounts of $30,000 at June 30, 1998 and 1997........ 1,336,403 1,601,808
Accounts receivable, other.............................. 165,251 85,887
---------- ----------
TOTAL RECEIVABLES.................................. 1,501,654 1,687,695
NET INVESTMENT IN SALES-TYPE LEASES....................... 1,313,081 1,559,976
INVENTORY................................................. 870,417 1,326,638
DEPOSITS AND PREPAID EXPENSES............................. 170,179 147,076
COMPUTER EQUIPMENT UNDER OPERATING LEASES,
at cost................................................. -- 20,160
Less accumulated depreciation........................... -- 18,660
---------- ----------
NET COMPUTER EQUIPMENT UNDER OPERATING LEASES...... -- 1,500
EQUIPMENT, at cost
Transportation equipment................................ 72,135 73,624
Maintenance equipment................................... 680,450 695,338
Office equipment........................................ 1,232,503 1,192,165
Leasehold improvements.................................. 283,597 255,037
---------- ----------
2,268,685 2,216,164
Less accumulated depreciation........................... 1,549,488 1,291,390
---------- ----------
NET EQUIPMENT...................................... 719,197 924,774
INTANGIBLES (net of accumulated amortization)
Covenants not to compete................................ -- 57,030
Goodwill................................................ 299,902 325,536
---------- ----------
TOTAL INTANGIBLES.................................. 299,902 382,566
---------- ----------
TOTAL ASSETS....................................... $4,874,430 $6,168,591
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
LIABILITIES
Demand note payable, bank............................... $1,707,009 $2,100,000
Demand note payable, stockholder........................ 290,762 --
Checks written in excess of account balance............. 321,053 --
Installment notes payable to banks and others........... 159,626 351,767
Discounted lease rentals................................ 1,189,460 1,490,944
Accounts payable, trade................................. 1,104,481 1,062,976
Customer deposits and advances.......................... 238,138 160,931
Accrued expenses........................................ 196,686 184,023
Income taxes payable.................................... 21,004 20,878
---------- ----------
TOTAL LIABILITIES.................................. 5,228,219 5,371,519
STOCKHOLDER'S EQUITY (DEFICIT)
Common stock, $1.00 par value; 25,000 shares authorized,
1,000 shares issued and outstanding.................. 1,000 1,000
Additional paid-in capital.............................. 9,586 9,586
Retained earnings (deficit)............................. (364,375) 786,486
---------- ----------
TOTAL STOCKHOLDER'S EQUITY (DEFICIT)............... (353,789) 797,072
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY
(DEFICIT)....................................... $4,874,430 $6,168,591
========== ==========
</TABLE>
The Consolidated Notes to Financial Statements are an integral part of these
statements.
F-39
<PAGE> 97
KENNSCO, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
REVENUES
Equipment sales and maintenance income............ $16,729,744 $20,372,736
Equipment sales-leases............................ 1,139,154 1,336,551
Operating lease income............................ 145,560 195,195
Financing lease income............................ 140,575 141,530
Interest and miscellaneous income................. 1,975 10,873
----------- -----------
TOTAL REVENUES................................. 18,157,008 22,056,885
----------- -----------
COSTS AND EXPENSES
Cost of equipment sales and maintenance........... 11,813,675 14,283,655
Cost of equipment sales-leases.................... 932,961 1,246,865
Inventory obsolescence............................ 455,000 462,500
Depreciation of leased equipment.................. -- 89,663
Selling, general and administrative expenses...... 5,670,847 6,252,593
Interest expense.................................. 432,261 395,795
----------- -----------
TOTAL COSTS AND EXPENSES....................... 19,304,744 22,731,071
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES................... (1,147,736) (674,186)
Income taxes...................................... 3,125 4,986
----------- -----------
NET INCOME (LOSS)................................... (1,150,861) (679,172)
Retained earnings, beginning of year.............. 786,486 1,465,658
----------- -----------
RETAINED EARNINGS (DEFICIT), END OF YEAR............ $ (364,375) $ 786,486
=========== ===========
</TABLE>
The Consolidated Notes to Financial Statements are an integral part of these
statements.
F-40
<PAGE> 98
KENNSCO, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(1,150,861) $ (679,172)
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Net profit on sales type leases added................ (206,192) (89,685)
Depreciation and amortization........................ 352,108 534,076
Loss on sale of assets............................... 2,784 105,900
Leased equipment transferred to inventory, at net
book value.......................................... 467,661 117,817
Principal portion of sales type lease payments
received............................................ 867,425 1,106,149
(Increase) decrease in receivables................... 186,041 59,369
(Increase) decrease in inventory..................... 456,221 433,428
(Increase) decrease in other assets.................. (23,103) 4,291
Checks written in excess of account balance.......... 321,053 --
Increase (decrease) in accounts payable and accrued
expenses............................................ 54,168 (201,385)
Increase (decrease) in customer deposits and
advances............................................ 77,207 (85,273)
Increase (decrease) in income taxes payable.......... 126 8,361
Increase (decrease) in deferred income taxes......... -- (10,014)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES......... 1,404,638 1,303,862
CASH FLOWS FROM INVESTING ACTIVITIES:
Equipment purchased for leasing........................... (881,999) (931,669)
Capital expenditures...................................... (76,856) (376,754)
Proceeds on sale of assets................................ 11,705 122,380
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES........... (947,150) (1,186,043)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) under demand notes payable........ (102,229) (141,083)
Payments on installment notes payable..................... (192,141) (287,975)
Proceeds from installment notes payable................... -- 394,065
Proceeds from discounted lease rentals.................... 676,145 1,446,385
Payments on discounted lease rentals...................... (977,629) (1,553,890)
----------- -----------
NET CASH (USED IN) FINANCING ACTIVITIES........... (595,854) (142,498)
----------- -----------
INCREASE (DECREASE) IN CASH................................. (138,366) (24,679)
Cash, beginning of year................................... 138,366 163,045
----------- -----------
CASH, end of year........................................... $ -- $ 138,366
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest............................................... $ 433,180 $ 395,765
=========== ===========
Income taxes........................................... $ 2,999 $ 6,721
=========== ===========
</TABLE>
The Consolidated Notes to Financial Statements are an integral part of these
statements.
F-41
<PAGE> 99
KENNSCO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS:
The Company is engaged in selling and leasing new and used computer
equipment. Additional revenues are derived from the maintenance and installation
of computer equipment and the management of computer networks.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All material intercompany transactions and
balances have been eliminated in consolidation.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE AND EXPENSE RECOGNITION:
Income from the sale of equipment and the related cost of equipment are
recorded at the time of customer acceptance of the equipment.
Maintenance and installation income is recorded at the time services are
performed or, if under contract, in the period earned. The related costs are
recorded as incurred.
As required by Statement of Financial Accounting Standards No. 13, the
Company's leasing activities as lessor are accounted for as either sales-type or
operating leases. Accordingly, leases that transfer substantially all of the
benefits and risks of ownership have been accounted for as sales-type leases.
All other leases have been accounted for as operating leases.
The accounting methods and the related financial reporting effects are
described below:
1. Sales-type leases: The present value of the minimum lease payments
receivable and guaranteed residual value are recorded as equipment
sales-leasing at the inception of the lease with a corresponding net
investment in sales-type leases. The cost of the equipment less the present
value of the estimated unguaranteed residual value is recorded as cost of
equipment sales-leasing.
2. Operating leases: Revenue consists of monthly rentals and is
recorded as operating lease income. The cost of the equipment is recorded
as equipment under operating leases and is depreciated over the estimated
useful lives of the equipment using the straight-line method.
F-42
<PAGE> 100
KENNSCO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RESIDUAL VALUES:
Residual values, representing the estimated value of the equipment at the
termination of a lease, are recorded in the financial statements at the
inception of each sales-type lease. Residual values are thereafter regularly
reviewed by management, and adjustments are made where it is considered there
has been a permanent reduction in value. No upward revision of residual values
is made subsequent to the inception of the lease.
Residual values relating to equipment which is subject to a sales-type
lease are recorded at their net present value and are incremented to their
future value on a yield basis over the lease term.
The residual values for operating leases are included in the equipment
under operating leases net book value and are subject to the same yearly review
as the residual values established for sales-type leases.
DISCOUNTED LEASE RENTALS:
Proceeds from financing equipment on a non-recourse basis is recorded on
the balance sheet as discounted lease rentals. In the event of default by the
lessee, the lender has first lien against the underlying leased equipment with
no further recourse against the Company.
INVENTORY:
Inventories consist of new and used computer equipment and maintenance
parts and equipment.
Inventories are valued at the lower of cost or market with cost determined
on the specific identification method for computer equipment and on the
first-in, first-out method for maintenance parts and other inventories. Market
for maintenance inventory is determined from published industry references where
available. The remainder of the maintenance inventory is reduced below cost by a
market valuation reserve based on management's estimate of the realizable value
and usefulness of the inventory in fulfilling its maintenance contracts.
DEPRECIATION:
Depreciation is computed using principally the straight-line method over
the estimated useful lives of the assets. The lives assigned are as follows:
<TABLE>
<S> <C>
Equipment on lease....................................... 2 - 3 years
Transportation equipment................................. 2 - 5 years
Maintenance equipment.................................... 3 - 7 years
Office equipment......................................... 5 - 7 years
Leasehold improvements................................... 2 - 20 years
</TABLE>
F-43
<PAGE> 101
KENNSCO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMORTIZATION:
Amortization of intangible assets is computed using the straight-line
method over the following periods:
<TABLE>
<S> <C>
Covenants not to compete................................. 5 years
Goodwill................................................. 15 - 40 years
</TABLE>
INCOME TAXES:
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
and tax credit carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.
NOTE 2. NET INVESTMENT IN SALES-TYPE LEASES
The components of the net investment in sales-type leases are as follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Total minimum lease payments to be received... $1,362,890 $1,631,498
Estimated unguaranteed residual values of
leased equipment............................ 85,528 92,853
Less unearned income.......................... (135,337) (164,375)
---------- ----------
NET INVESTMENT IN SALES-TYPE LEASES...... $1,313,081 $1,559,976
========== ==========
</TABLE>
The following is a schedule by year of minimum lease payments receivable on
non-cancelable sales-type leases:
<TABLE>
<CAPTION>
YEARS ENDING JUNE 30,
---------------------
<S> <C>
1999....................................................... $ 780,369
2000....................................................... 494,748
2001....................................................... 87,773
----------
TOTAL MINIMUM LEASE PAYMENTS RECEIVABLE.................. $1,362,890
==========
</TABLE>
F-44
<PAGE> 102
KENNSCO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Computer equipment............................ $ 381,970 $ 444,895
Maintenance parts and equipment............... 937,287 1,318,391
Other......................................... 25,860 25,852
---------- ----------
1,345,117 1,789,138
Less market valuation reserve for maintenance
parts and equipment......................... (474,700) (462,500)
---------- ----------
TOTAL INVENTORY.......................... $ 870,417 $1,326,638
========== ==========
</TABLE>
NOTE 4. DEMAND NOTES PAYABLE
The Company has a $2,300,000 revolving line of credit, of which $1,707,009
and $2,100,000 was outstanding at June 30, 1998 and 1997, respectively. The line
carries an average interest rate of 4.00% over the prime rate (prime rate at
June 30, 1998 was 8.50%). The line of credit is secured by the Company's
accounts receivable, inventory, equipment, general intangibles and the personal
guarantee of the stockholder. The Company is required to make monthly principal
payments of $40,000 and interest. The credit line expires February 28, 1999.
The Company has a demand note payable to the stockholder of which $290,762
was outstanding at June 30, 1998. This note payable is subordinate to the
revolving line of credit described above and requires monthly interest only
payments of 2.00% over the prime rate. The note is secured by the Company's
accounts receivable, inventory, equipment and general intangibles. Interest
expense related to this note amounted to $4,375 for 1998.
NOTE 5. INSTALLMENT NOTES PAYABLE TO BANKS AND OTHERS
Installment notes payable consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Note payable to Century Bank National Association, prime
rate plus 2.00% payable in monthly installments of
$5,825 through March 1999 and $5,804 on April 1, 1999,
secured by accounts receivable, inventory, equipment
and general intangibles................................ $ 55,378 $116,128
Note payable to Guardian Capital, Inc., 9.50% payable in
monthly installments of $11,507 through March 1999,
secured by furniture, fixtures and equipment........... 99,482 221,340
Note payable to Sencore, 9.90% payable in monthly
installments of $884 through November 1998, secured by
equipment.............................................. 4,766 14,299
-------- --------
TOTAL INSTALLMENT NOTES PAYABLE..................... $159,626 $351,767
======== ========
</TABLE>
F-45
<PAGE> 103
KENNSCO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Maturities of long-term notes payable are as follows:
<TABLE>
<CAPTION>
YEARS ENDING JUNE 30,
---------------------
<S> <C>
1999........................................................ $159,626
--------
TOTAL..................................................... $159,626
========
</TABLE>
NOTE 6. DISCOUNTED LEASE RENTALS
The Company utilizes its lease rentals receivable and underlying equipment
in leasing transactions as collateral to borrow from financial institutions at
fixed rates on a non-recourse basis. In return for this secured interest, the
Company receives a discounted cash payment. In the event of a default by a
lessee, the financial institution has a first lien on the underlying leased
equipment, with no further recourse against the Company. Proceeds from
discounting are recorded on the balance sheet as discounted lease rentals. As
lessees make payments, financing lease income and interest expense are recorded.
Discounted lease rentals at 8.50% to 10.00% are reduced by the interest method
and are due in varying installments through June 2001. Discounted lease rentals
are secured by assignment of lease contracts.
Scheduled maturities of discounted lease rentals are as follows:
<TABLE>
<CAPTION>
YEARS ENDING JUNE 30,
---------------------
<S> <C>
1999....................................................... $ 685,049
2000....................................................... 428,785
2001....................................................... 75,626
----------
TOTAL DISCOUNTED LEASE RENTALS........................... $1,189,460
==========
</TABLE>
NOTE 7. INCOME TAX MATTERS
Income taxes included on the consolidated statements of income consist of
the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------
1998 1997
------- --------
<S> <C> <C>
Current tax expense (benefit):
Federal......................................... $ -- $ --
State........................................... 3,125 15,000
Deferred tax expense (benefit):
Federal......................................... -- (8,397)
State........................................... -- (1,617)
------ -------
TOTAL INCOME TAXES........................... $3,125 $ 4,986
====== =======
</TABLE>
F-46
<PAGE> 104
KENNSCO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The net deferred tax liability included in the consolidated balance sheets
consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Basis differences............................ $ 339,014 $ 391,778
Net operating loss carryforwards............. 531,257 296,755
Valuation allowance.......................... (662,517) (370,794)
--------- ---------
Deferred tax assets..................... 207,754 317,739
--------- ---------
Deferred tax liabilities:
Basis differences............................ (141,774) (159,827)
Difference in lease accounting for tax
purposes and financial statement
purposes.................................. (65,980) (157,912)
--------- ---------
Deferred tax liabilities................ (207,754) (317,739)
--------- ---------
NET DEFERRED TAX LIABILITY.............. $ -- $ --
========= =========
</TABLE>
For tax purposes, the Company has approximately $1,400,000 of federal and
state net operating loss carryforwards, which expire in the years 2001 through
2012. Since it is more likely than not the net operating loss carryforwards will
expire unused, a valuation allowance of $662,517 has been recorded against the
deferred tax asset.
NOTE 8. RENTAL COMMITMENT
The Company and its subsidiary lease several office-warehousing facilities
from unrelated parties. In addition to base rent, the agreements provide for
monthly payments of pro rata shares of real estate taxes and operating expenses.
Rent expense related to these leases is to $586,827 for 1998 and $465,724 for
1997.
The following is a schedule by year of minimum future rental commitments on
these leases as of June 30, 1998:
<TABLE>
<CAPTION>
YEARS ENDING JUNE 30,
---------------------
<S> <C>
1999......................................... $378,320
2000......................................... 155,479
2001......................................... 30,884
--------
TOTAL RENTAL COMMITMENTS................... $564,683
========
</TABLE>
NOTE 9. RELATED PARTY LEASE
The Company leases an office-warehouse facility from the stockholder under
a lease that expires on November 30, 2006. In addition to monthly lease payments
of $20,500, the Company is responsible for all real estate taxes, utilities and
maintenance costs. The Company has guaranteed the debt incurred by the
stockholder to finance the cost of the facility. Rent expense, net of sublease
rental income, related to this lease amounted to $218,300 for 1998 and $208,008
for 1997.
F-47
<PAGE> 105
KENNSCO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. SUBSEQUENT EVENT
On March 22, 1999 the Company executed and closed on a sale agreement
whereby the Company sold all of its assets to a third party for $1,000,000. In
addition, the third party assumed all of the Company's liabilities. The Company
received $750,000 cash at closing and a note in the amount of $250,000. The note
will be converted into shares of stock issued by the acquiring company within
six months of the date of closing.
NOTE 11. UNAUDITED INTERIM FINANCIAL STATEMENTS
As of December 31, 1998, and for the six months ended December 31, 1998,
prior to the acquisition by Wareforce:
KENNSCO BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
UNAUDITED
<S> <C>
Cash....................................................... $ 159,655
Accounts Receivable, net of allowance of $57,112........... 1,485,391
Net Investment in Sales Type Leases........................ 1,442,264
Inventory.................................................. 714,436
Deposits and Prepaid Expenses.............................. 131,320
----------
Current Assets........................................... 3,933,066
Property and Equipment, net................................ 594,561
Goodwill, net of amortization of $119,301.................. 287,085
----------
Total Assets............................................. $4,814,712
==========
Accounts Payable........................................... $1,025,789
Demand Note Payable to Bank................................ 1,613,203
Demand Note Payable to Stockholder......................... 290,762
Installment Notes Payable.................................. 56,595
Discounted Lease Rentals................................... 1,277,857
Accrued Expenses........................................... 320,398
Deposits and Advances...................................... 186,309
Income Taxes............................................... 5,079
----------
Total Liabilities........................................ 4,775,992
----------
Common Stock, $1.00 par value; 25,000 authorized, 1000
issued and outstanding................................... 1,000
Additional paid in capital................................. 9,586
Retained Earnings -- Current............................... 392,509
Retained Earnings.......................................... (364,375)
----------
Total Stockholder's Equity............................... 38,720
----------
Total Liabilities and Equity............................. $4,814,712
==========
</TABLE>
F-48
<PAGE> 106
KENNSCO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
KENNSCO INCOME STATEMENT
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
UNAUDITED
<S> <C>
Net Revenue................................................ $9,667,293
Cost of sales.............................................. 6,511,494
----------
Gross Profit............................................... 3,155,799
Selling, General and Administrative Expenses............... 2,598,213
----------
Income from Operations..................................... 557,586
Interest Expense........................................... 152,260
Interest Income
Other Income (Expense)..................................... (12,817)
----------
Income before Income Taxes................................. 392,509
Provision for Income Taxes................................. --
----------
Net Income................................................. $ 392,509
==========
</TABLE>
F-49
<PAGE> 107
KENNSCO, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
UNAUDITED
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 392,509
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Net profit on sales type leases added.................. (281,467)
Depreciation and amortization.......................... 135,067
Leased equipment transferred to inventory, at net book
value................................................. (64,908)
Principal portion of sales type lease payments
received.............................................. 531,837
Changes in operating assets and liabilities:
Accounts receivable.................................... 16,263
Inventories............................................ 155,981
Other assets........................................... 38,859
Accounts payable and accrued expenses.................. 45,020
Customer deposits and advances......................... (51,829)
Income taxes payable................................... (15,925)
---------
NET CASH PROVIDED BY OPERATING ACTIVITIES......... 901,407
CASH FLOWS FROM INVESTING ACTIVITIES:
Equipment purchased for leasing........................... (314,645)
Capital expenditures...................................... (7,400)
Proceeds on sale of assets................................ 9,786
---------
NET CASH (USED IN) INVESTING ACTIVITIES........... (312,259)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under demand notes payable....................... (93,806)
Payments on installment notes payable..................... (103,031)
Proceeds from discounted lease rentals.................... 525,043
Payments on discounted lease rentals...................... (436,646)
NET CASH (USED IN) FINANCING ACTIVITIES........... (108,440)
---------
INCREASE IN CASH............................................ 480,708
Cash, beginning of year................................... (321,053)
---------
Cash, end of year......................................... $ 159,655
=========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest............................................... $ 152,260
</TABLE>
F-50
<PAGE> 108
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE HEREBY. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES COVERED HEREBY IN ANY JURISDICTION OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, IN ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
-------------------------
UNTIL [90 DAYS AFTER THE DATE OF THIS PROSPECTUS], ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
WAREFORCE.COM, INC.
3,191,448 SHARES
-------------------------
COMMON STOCK
PROSPECTUS
, 1999
------------------------------------------------------
------------------------------------------------------
<PAGE> 109
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Other expenses in connection with the issuance and distribution of the
securities to be registered hereunder, all of which will be paid by the
registrant, will be substantially as follows:
<TABLE>
<CAPTION>
ITEM AMOUNT
---- -----------
<S> <C>
SEC registration fee........................................ $ 4,836.03
Accounting fees and expenses*............................... $ 35,000.00
Legal fees and expenses*.................................... $ 50,000.00
Blue Sky fees and expenses.................................. $ 10,000.00
Printing and engraving expenses*............................ $ 20,000.00
Transfer Agent and Registrar fees and expenses*............. $ 2,500.00
Miscellaneous fees and expenses*............................ $ 2,663.97
-----------
Total..................................................... $125,000.00
===========
</TABLE>
- -------------------------
* Estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The General Corporation Law of Nevada permits provisions in the articles,
by-laws or resolutions approved by shareholders which limit liability of
directors for breach of fiduciary duty to certain specified circumstances,
namely, breaches of their duties of loyalty, acts or omissions not in good faith
or which involve intentional misconduct or knowing violation of law, acts
involving unlawful payment of dividends or unlawful stock purchases or
redemptions, or any transaction from which a director derives an improper
personal benefit. The Company's by-laws indemnify its Officers and Directors to
the full extent permitted by Nevada law. The by-laws with these exceptions
eliminate any personal liability of a Director to the Company or its
shareholders for monetary damages for the breach of a Director's fiduciary duty
and therefore a Director cannot be held liable for damages to the Company or its
shareholders for gross negligence or lack of due care in carrying out his
fiduciary duties as a Director. The Company's Articles provide for
indemnification to the full extent permitted under law which includes all
liability, damages and costs or expenses arising from or in connection with
service for, employment by, or other affiliation with the Company to the maximum
extent and under all circumstances permitted by law. Nevada law permits
indemnification if a director or officer acts in good faith in a manner
reasonably believed to be in, or not opposed to, the best interest's of the
corporation. A director or officer must be indemnified as to any matter in which
he successfully defends himself. Indemnification is prohibited as to any matter
in which the director or officer is adjudged liable to the corporation. Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers, and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
II-1
<PAGE> 110
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In March 1998, the 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. This placement was
issued under Regulation D of the Securities Act of 1933 to a group of accredited
foreign investors. 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.
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 suspend the placement at $2.4 million until market conditions were
more favorable for continuing the placement.) This placement was issued under
Regulation D of the Securities Act of 1933 to a group of accredited foreign
investors. We paid approximately $200,000 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 and
general working capital purposes.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
2.1 Agreement and Plan of Reorganization between Jolley Vending,
Inc. and Wareforce Incorporated, dated as of July , 1998+
3.1 Amended and Restated Certificate of Incorporation of the
Company+
3.2 Bylaws of the Company+
4.1 Form of the Company's Common Stock Certificate+
4.2 Warrant Agreement by and between Wareforce.com, Inc. and
Interwest Transfer Co., Inc. as Transfer Agent, dated as of
, 1999 with Form of Warrant as Exhibits A and B+
5.1 Opinion of Thomas G. Kimble and Associates+
10.1 Promissory Note with Orie Rechtman as Maker and Wareforce
Incorporated as Payee, dated May 23, 1997+
10.2 Promissory Note with Orie Rechtman as Maker and Wareforce,
Inc, as Payee, dated February 18, 1998+
10.3 Lease Agreement by and between Kenneth Searl, as Landlord,
and Wareforce Incorporated, as Tenant, dated March 22, 1999+
10.4 Channel Agreement by and between Wareforce, Inc. and
Microsoft Corporation, dated as of May 19, 1998, including
Large Account Reseller Addendum+
10.5 Agreement by and between Wareforce Incorporated and the Los
Angeles County, California, dated as of September 1, 1997+
10.6 Amended Agreement by and between the Company and the State
of Florida, dated as of April 1, 1997+
10.7 Loan and Security Agreement by and between Congress
Financial Corporation (Western) as Lender and Wareforce
Incorporated as Borrower, dated August 27, 1998+
</TABLE>
II-2
<PAGE> 111
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
10.8 Loan and Security Agreement by and between Congress
Financial Corporation (Western) as Lender and C.Y.
Investment Inc. as Borrower, dated August 27, 1998+
10.9 First Amendment to Loan and Security Agreement by and
Between Congress Financial Corporation (Western) and
Wareforce Incorporated, dated March 22, 1999+
10.10 Stock Purchase Agreement and Escrow Instructions between by
and between Christopher Chu and Alina Chu Family Trust,
Vivien Mak, Richard Fu and Luisa Fu and the Company, dated
August 28, 1998+
10.11 Employment Agreement between Wareforce Incorporated and Orie
Rechtman+
10.12 Employment Agreement and Amendment No. 1 between Wareforce
Incorporated and Don Hughes+
10.13 Employment Agreement and Amendment No. 1 between Wareforce
Incorporated and Dan Ricketts+
10.14 Employment Agreement between Wareforce Incorporated and
Darrell Tate+
10.15 Employment Agreement between Wareforce Incorporated and
Richard Fu+
10.16 Employment Agreement between Wareforce Incorporated and
Marcia Mazria+
10.17 Employment Agreement between the Company, Wareforce
Incorporated and Kenneth Searl+
10.18 Wareforce.com, Inc. 1998 Stock Option/Stock Issuance Plan+
10.19 uMember.com, Inc. 1999 Stock Option/Stock Issuance Plan+
15.1 Letter of Arthur Anderson LLP Acknowledging Use of Unaudited
Interim Financial Statements+
16.1 Letter of Ernst & Young LLP Regarding Change in Certifying
Accountant
21.1 Subsidiaries+
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Ernst & Young LLP
23.3 Consent of Boyum & Barenscheer LLP
23.4 Consent of Thomas G. Kimble and Associates (included in
Exhibit 5.1)+
27.1 Financial Data Schedule (EDGAR version only)
</TABLE>
- -------------------------
+ previously filed.
(b) Financial Statement Schedules. The financial statement schedules have
been omitted because the information required to be set forth therein is not
applicable or is shown in the financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
The registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) Include any additional or changed material information on the
plan of distribution; and
II-3
<PAGE> 112
(iii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the Registration Statement.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment as a new Registration Statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE> 113
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Amendment No. 1 to Form S-1 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
City of El Segundo, State of California, on September 29, 1999.
WAREFORCE.COM, INC.
By: /s/ ORIE RECHTMAN
-----------------------------------
Orie Rechtman, Chairman
(Chief Executive Officer)
By: /s/ DON HUGHES
-----------------------------------
Don Hughes, Chief Financial Officer
(Chief Financial Officer)
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Thomas G. Kimble or Van L. Butler, the
undersigned's true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for the undersigned and in the undersigned's
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing, requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE DATE
--------- ----
<S> <C>
/s/ ORIE RECHTMAN September 29, 1999
- -----------------------------------------------------
Orie Rechtman, Director
/s/ DON HUGHES September 29, 1999
- -----------------------------------------------------
Don Hughes, Director
/s/ DAN RICKETTS September 29, 1999
- -----------------------------------------------------
Dan J. Ricketts, Esq., Director
</TABLE>
II-5
<PAGE> 1
EXHIBIT 16.1
September 29, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Gentlemen:
We have read the "Change in Independent Accountants" paragraph on page 56 of
the registration statement on Form S-1 of Wareforce.com, Inc. dated September
29, 1999 and are in agreement with the statements contained in the third and
fourth sentences therein. We have no basis to agree or disagree with other
statements of the registrant contained therein.
/s/ ERNST & YOUNG LLP
Woodland Hills, California
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wareforce.com, Inc.:
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made part of this Form S-1
Registration Statement.
/s/ ARTHUR ANDERSEN LLP
Los Angeles, California
September 27, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated July 22, 1997, in the Registration Statement (Form S-1
No. 333-81327) and related Prospectus of Wareforce.com, Inc. for the
registration of 3,191,448 shares of its common stock.
/s/ ERNST & YOUNG LLP
Woodland Hills, California
September 29, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Wareforce.Com, Inc.
1700 Rosecrans Avenue
Suite B
Manhattan Beach, California 90266
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) in regards to Kennsco, Inc. for the year
ended June 30, 1998 and 1997, included in or made part of this Form S-1
Registration Statement.
/s/ BOYUM & BARENSCHEER PLLP
Boyum & Barenscheer PLLP
Certified Public Accountants
Minneapolis, Minnesota
September 27, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE UNAUDITED
FINANCIAL STATEMENT FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 JUN-30-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 JUN-30-1999
<CASH> 818 421
<SECURITIES> 42 76
<RECEIVABLES> 19,754 26,702
<ALLOWANCES> 0 0
<INVENTORY> 1,814 3,667
<CURRENT-ASSETS> 23,802 34,283
<PP&E> 1,127 1,902
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 27,729 40,729
<CURRENT-LIABILITIES> 27,503 37,674
<BONDS> 0 0
0 0
0 0
<COMMON> 10 11
<OTHER-SE> 209 2,368
<TOTAL-LIABILITY-AND-EQUITY> 27,729 40,729
<SALES> 0 0
<TOTAL-REVENUES> 88,895 70,797
<CGS> 0 0
<TOTAL-COSTS> 80,138 62,584
<OTHER-EXPENSES> 11,325 8,298
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 551 316
<INCOME-PRETAX> (3,961) (463)
<INCOME-TAX> 771 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,190) (463)
<EPS-BASIC> 0 0
<EPS-DILUTED> (.38) (.04)
</TABLE>
