**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

----

 

**FORM10-K**

 

| ý                                                                                                                                                                                                 | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF  1934**   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                   |                                                                                          |
| **For the fiscal year ended December 31, 2002**                                                                                                                                                        |
|                                                                                                                                                                                                   |                                                                                          |
| **o**                                                                                                                                                                                                  | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                   |                                                                                          |
| **For the transition period from                 to               ** |
|                                                                                                                                                                                                   |                                                                                          |
| **Commission file number 0-24982**                                                                                                                                                                     |

 

----

 

**ON-SITESOURCING, INC.**

(EXACTNAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

| **Delaware**                                                    |   | **54-1648470**                       |
|-----------------------------------------------------------------|--------|--------------------------------------|
| (STATE OR OTHER JURISDICTION OF  INCORPORATION OR ORGANIZATION) |   | (I.R.S. EMPLOYER IDENTIFICATION NO.) |
|                                                            |   |                                 |
| **832 North Henry Street, Alexandria, Virginia**                |   | **22314**                            |
| (ADDRESS  OF PRINCIPAL EXECUTIVE OFFICES)                       |   | (ZIP  CODE)                          |
|                                                            |   |                                 |
| **(703) 276-1123**                                              |
| (REGISTRANT’S  TELEPHONE NUMBER, INCLUDING AREA CODE)      |
|                                                            |
| Securities  registered pursuant to Section 12(b) of the Act:    |

 

| **TITLE OF EACH CLASS:** |   | **NAME OF EACH EXCHANGE  ON WHICH REGISTERED:****** |
|--------------------------|--------|-----------------------------------------------------|
| None                     |   | None                                                |

 

Securitiesregistered pursuant to Section 12(g) of the Act:

 

**Common Stock, $.01 par value**

 

Indicated by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. YES ý NO o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 Regulation S-K is notcontained herein, and will not be contained, to the best of the registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theSecurities Exchange Act of 1934).  YES o No ý

 

At March 21, 2003 theregistrant had 5,494,225 shares of common stock (the “Common Stock”)outstanding, and the aggregate market value of the Common Stock held bynon-affiliates of the registrant was approximately $6,359,483.  The aggregate market value was determinedbased on the closing price of the Common Stock on the NASDAQ Small Cap Marketon March 21, 2003.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Portions of the ProxyStatement for the 2003 Annual Meeting of the Registrant which will be filedwith the Commission within 120 days after the close of the fiscal year areincorporated by reference into Part III.

 

 

----

 

**ON-SITE SOURCING, INC.**

 

**ANNUAL REPORT ON FORM 10-K**

**FOR THE YEAR ENDED DECEMBER 31, 2002**

 

**TABLE OF CONTENTS**

 
| PART I    |                                                                                        |
|-----------|---------------------------------------------------------------------------------------------|
|      |                                                                                        |
| Item 1.   | Business                                                                                    |
| Item 2.   | Property                                                                                    |
| Item 3.   | Legal Proceedings                                                                           |
| Item  4.  | Submission  of Matters to a Vote of Securityholders                                         |
|      |                                                                                        |
| PART II   |                                                                                        |
|      |                                                                                        |
| Item  5.  | Market  for the Registrant’s Common Equity and Related Stockholder Matters             |
| Item 6.   | Selected Financial  Data                                                                    |
| Item  7.  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
| Item  7A. | Quantitative  and Qualitative Disclosures of Market Risk                                    |
| Item  8.  | Financial  Statements and Supplementary Data                                                |
| Item  9.  | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure       |
|      |                                                                                        |
| PART III  |                                                                                        |
|      |                                                                                        |
| Item  10. | Directors  and Executive Officers of the Company                                            |
| Item 11.  | Executive Compensation                                                                      |
| Item  12. | Security  Ownership of Certain Beneficial Owners and Management                             |
| Item  13. | Certain  Relationships and Related Transactions                                             |
| Item 14.  | Controls &  Procedures                                                                  |
|      |                                                                                        |
| PART IV   |                                                                                        |
|      |                                                                                        |
| Item  15. | Exhibits,  Financial Statement Schedules and Reports on Form 8-K                            |
|      | Signatures                                                                                  |
|      | Certifications                                                                              |

 

1

----

 

**PART I**

 

This Annual Report on Form10-K contains forward-looking statements such as our intentions, hopes,beliefs, expectations, strategies and predictions of our future activities, orother future events or conditions.  Suchstatements are “forward looking statements” within the meaning of Section 27Aof the Securities Act of 1993, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended, and are intended to be covered by the safeharbors created thereby. Investors are cautioned that all forward-lookingstatements involve risks and uncertainty, including, without limitation, thefactors identified in Part I, Item 1 of this Report. Although we believe thatthe assumptions underlying the forward-looking statements contained herein arereasonable, any of the assumptions could be inaccurate, and, therefore, therecan be no assurance that the forward-looking statements included in this Reportwill prove to be accurate. In light of the significant uncertainties inherentin the forward-looking statements included herein, the inclusion of suchinformation should not be regarded as a representation by us or any otherperson that our objectives and plans will be achieved.

 

**ITEM 1. Business**

 

**General**

 

On-Site Sourcing, Inc. (“On-Site,”“the Company,” “we,” “us,” or “our”) provides document and information management services through itsfacilities in the greater Atlanta, Baltimore, New York City, Philadelphia,Washington, D.C., Chicago, Wilmington, and Tempe (through October 15, 2002)metropolitan areas.  We help clients ininformation-intensive industries manage large volumes of documents andinformation, allowing them to concentrate on their core businessoperations.  Our target clientstypically generate large volumes of documents and information that requirespecialized processing, distribution, storage, and retrieval.  Our typical clients include law firms,insurance companies, healthcare organizations, non-profit organizations, accounting,consulting and finance firms and other organizations throughout the UnitedStates.  In August 2002 we began toserve clients in the Chicago, Illinois and Wilmington, Delaware areas throughthe opening of two new offices.

 

Effective October 15, 2002,the Company ceased production at its facility in Tempe, Arizona as a result ofa strategic decision to focus on larger geographic markets for growth and tominimize current losses.  The Arizonaproduction facility represented a component of the Imaging Services Segment.

 

On-Site was originallyincorporated in Virginia in December 1992, and changed its state ofincorporation to Delaware in March 1996. Our principal executive offices arelocated at 832 North Henry Street, Alexandria, Virginia  22314, and our telephone number is (703)276-1123. Our common stock trades on the Nasdaq Small Cap Market under thesymbol “ONSS.”

 

**Strategy**

 

Our goal is to become anational, single source provider of document and information managementservices and printing services for clients in our targeted industries. Toachieve this goal, we intend to continue implementing a focused businessstrategy based on the following elements:

 

•                  *Broaden Our GeographicPresence*.  We intend to expand our geographicpresence to gain access to new markets for clients. We believe that expandingour geographic presence will also help us gain access to additional clients inour existing markets which have document and information management needs inmultiple regions of the United States. We will identify attractive geographic markets based on the potentialclient base and level of demand for our services. We currently have offices inthe greater Atlanta, Baltimore, NewYork City, Philadelphia, Washington, D.C., Chicago, Illinois and Wilmington, Delawaremetropolitan areas.

 

•                  *Expand and Diversify OurClient Base*.  We continue to market our document andinformation management services to additional information-intensive industries,especially the federal government, in order to gain access to new clientmarkets.  In addition to the GSA Federal Supply Schedule, which wasawarded in December 2001, the Company has also secured a subcontract role onthe NIH IMAGE World2 contract, which is a government wide acquisition vehicle(GWAC) from which any federal government agency can buy services.  During2002, the Company established a significant pipeline of potential newgovernment business and submitted a number of proposals.

 

•                  *Implement New Technology*.  Wecontinually seek to identify and implement new technologies that can betterfulfill the document and information management needs of our clients, includingtechnologies such as web-based applications and mass storage devices.

 

•                  *Expand and Diversify OurDocument and Information Management Services*.  We seek to expand anddiversify our service offerings, particularly our electronic file processingcapabilities, with the goal of enabling existing and potential clients toobtain all of their data and information management services from us.

 

2

----

 

•            *Seek Strategic Acquisitions*.  Weseek strategic acquisitions that we believe will expand our client base andincrease our cross-selling opportunities. Our goal is to identify acquisition candidates that can help us gainaccess to information-intensive industries in addition to the industries thatwe currently serve.  We also believethat such acquisitions can help us achieve greater economies of scale and helpexpand the scale and depth of our service offerings in existing markets.

 

**Segments**

 

We have three significantoperating segments including, imaging, reprographics and digital printing, eachof which is described below.  Prior to2002, we also operated an additional segment, facilities management services,which involved the on-premises management of a client’s support services,including mailroom operations, facsimile transmission, records and supply roommanagement and copying services.  Wecanceled several of our facilities management contracts in 2001 and we currentlyhave only one ongoing facilities management engagement.  Segment disclosures are presented inNote 17 of the Notes to Financial Statements included in this AnnualReport on Form 10-K.

 

**OurServices**

 

The services we offergenerally fall into three different categories:  imaging, reprographics and digital printing.

 

*Imaging*.  Ourimaging services consist of both image and data capture services, whichgenerally involve the scanning, conversion and/or extraction of data fromvarious media into electronic form, and data management services, whichinvolves the storage and manipulation of data in electronic form.  We offer imaging services through ourIllinois, Delaware, Georgia, New York, and Virginia facilities; prior toOctober 15, 2002 we also offered these services through our Arizonafacility.  We license variousthird-party software applications in connection with our imaging services,including Concordance, Summation, iConect, Dataflight and IPRO.

 

Clients seek to convert andstore data in electronic form for various reasons.  For clients that are required to retain data for long periods oftime for legal, regulatory or compliance reasons, the electronic medium offersa number of advantages.  Compared topaper-based storage, data stored in electronic form is often more secure, andtakes less space.  For clients thatrequire constant or frequent access to their stored data, or occasionalreference to the data in support of ongoing business operations, the electronicformat allows the manipulation of large amounts of data quickly andefficiently.  Maintaining data inelectronic form permits clients to:

 

•                  retrieve the data quickly;

•                  organize the information in multiple indexingand text-search formats;

•                  have the data distributed at multiplelocations; and

•                  avoid the logistical problems and costs ofpaper-based storage.

 

Our image and data captureservices generally involve the scanning of paper documents into electronicformat through optical scanners, the conversion of electronic files into otherelectronic formats and the extraction of data from electronic files.  We can store electronic information as animage, or, using optical character recognition and other technologies, extractdata from an electronic file and store it in a database format.  Extracted data can be more easilymanipulated and offer additional processing options.  Our investment in document scanners, software licenses,proprietary software programs and other imaging technology, combined with theexperience of our personnel in the scanning and conversion process, enable usto perform the scanning, conversion and extraction process more efficiently,more effectively and in a shorter period of time than our clients.  These investments, together with our abilityto simultaneously draw on the resources of our various facilities, enable us tohandle information and document management projects on a scale and volume thatour clients and many of the smaller competitors in our industry, cannot manage.

 

Our data management servicesconsist of the storage, indexing, formatting, retrieval, delivery and return tostorage of electronic data in a rapid time frame.  These services offer clients the benefits of electronic storageand retrieval without having to purchase their own electronic storage andretrieval system.  Clients can use ourdata management services to access large volumes of stored documents or dataimmediately, in a manner that would be impossible using conventional,paper-based filing systems.  We canindex stored electronic data by several criteria, allowing a client to usesimple but precise computer search techniques to rapidly access individualdocuments or types of documents.  Wealso have the capability to print large volumes of electronic data at a highrate of speed, known as “blowback” printing, when a client requires hard copiesof certain electronically stored documents. Our technical support staff assists clients in developing customizedindexing systems and selecting appropriate file formats for the storeddata.  Our staff also helps trainclients in the use of, and provides on-going support for, variousimaging-related software applications.

 

We can store electronicdata, whether in original or extracted form, on a variety of media.  The type of storage medium selected dependson the type of data and the needs of the client, including factors such as:

 

•                  the need for access to and control over thedata;

•                  the length of time the data needs to bestored;

 

3

----

 

•                  the reasons for storing the data, such as forlitigation support, regulatory compliance or other reasons; and

•                  the degree of security required for the data.

 

Data for which immediate andfrequent access is required are often stored on-line in Internet-basedrepositories, while less time-critical data are often stored off-line on amagnetic medium, such as computer tapes or diskettes, or on optical laserdiscs, such as compact discs.  Ourtechnical support staff assists clients in selecting the storage medium mostappropriate for their needs.

 

We provide imaging servicesprimarily to law firms and their clients, although we also serve insurancecompanies, healthcare organizations, non-profit organizations, accounting,consulting and finance firms and other document-intensive industries. A typicalimaging job involves a law firm representing a client in a litigation oradministrative matter. In order for the firm to prepare for its case it oftenmust review a large number of documents and other data.  We enable the firm to convert the originaldata, whether in paper format or various electronic files, into an electronicformat.  We can then extract, format andindex the data as required, allowing the firm to search the information for specifickey words, or index the data according to particular categories, therebyhelping them identify critical documents or groups of documents more easily andefficiently.  We can also print largevolumes of the converted data on an expedited time frame, to the extent thefirm requires hard copies of certain data.

 

For each imaging job, ourquality control personnel compare the number of scanned pages****against the number of original pages****to verify that the correct number oforiginals have been scanned or converted. These personnel also confirm that a high-quality image was captured orblown back, as applicable, match indexing numbers applied to the document insequential order between the scanned and original documents, and confirm thatall added fields in a particular document were captured and that the hardcopies of the documents were reassembled to their original condition.

 

As of March 21, 2003, weowned the following equipment for use in our imaging segment:

 

•                  54 black and white blowback stations;

•                  27 high-speed black and white scanning stations;

•                  18 quality control stations for our blowbackand scanning processes;

•                  three scanners for scanning color documents;and

•                  one scanner for scanning oversize documents.

 

Our billing methodology forimaging services depends on the type of service provided.  For scanning and blowback printing, wetypically charge the client on a per-page basis.  For coding, we typically charge the client on a per-page basisand according to the number of fields coded on each page.  We generally bill services involving dataextraction, manipulation, indexing, formatting and similar services on aper-file basis.  For our data storageservices, we typically charge the client a fee based on the amount of data tobe stored and length of storage, as well as licensing fees for the third-partysoftware applications we use to store and retrieve the data. Our imagingservices accounted for approximately 39%, 29% and 27% of our consolidatedrevenues for the years ended December 31, 2002, 2001, and 2000, respectively.

 

*Reprographics*. Reprographics involves the copying and management of large amounts ofpaper****documents, extracted intheir original format from the offices and files of our clients.  Despite the advantages and increasingpopularity of electronic data storage, stored information remains primarilypaper-based.  As discussed above, thelaw firms that comprise a substantial portion of our client base often mustreview and manage large volumes of documents in connection with litigation oradministrative cases, much of them in paper form.  It is often critical for these firms to accurately record, trackand label each of the documents involved in the particular case, have largenumbers of these documents photocopied for other participants in the case andmanage and organize these documents.  Wealso provide reprographic services to insurance companies, healthcareorganizations, non-profit organizations, accounting, consulting and financefirms and other organizations that typically deal with large amounts ofpaper-based documents. The typical reprographic services we provide includephotocopying, binding, hole-punching, Bates stamping (which involves stampingor applying numbers to individual pages), labeling, collating, assembling andquality review.

 

We offer reprographics servicesthrough our****Illinois, Delaware,Georgia, New York, Pennsylvania, Washington, D.C., and Virginia facilities;prior to October 15, 2002 we also offered these services through our Arizonafacility.  Our reprographics servicesare available 24 hours a day, seven days a week in order to provide the promptturn-around time often required by our clients.  A typical job can range in size from single documents with asmall number of pages to multiple sets of documents involving more than amillion pages.

 

We maintain an in-housedispatch staff of approximately 45****persons,and own or lease a fleet of approximately 25 vehicles, for our courier andshipment needs.  Generally, our in-housecourier service picks up a reprographics job from the client’s facility and deliversit to our production center.  At ourproduction center, we process the job according to the client’s instructionsand our in-house dispatch staff returns the processed documents as directed bythe client.  Our quality control processextends from the beginning of the job through completion, enabled by ourproprietary box-tracking system, BoxTrax that tracks each box of documents asit is processed through our system. Dedicated project managers monitor the progress of each job throughoutthe production process.  Our qualitycontrol personnel check each page of the reproduced documents to verifylegibility, correct page order and number of pages copied.

 

4

----

 

As of March 21, 2003, weowned or leased approximately 179 photocopiers for use in our reprographicssegment, including:

 

•                  134 black and white photocopiers, of which 83were owned and 51 were leased;

•                  seventeen high-speed black and whitephotocopiers, of which two were owned and fifteen were leased;

•                  thirteen color photocopiers, of which threewere owned and ten were leased;

•                  three Docutech machines, all of which wereowned; and

•                  twelve photocopiers for copying oversizeddocuments, of which ten were owned and two were leased.

 

We also maintain a staff ofin-house technicians at each of our reprographics centers to service ourphotocopiers and other reprographics equipment.

 

We generally charge for ourphotocopying services on a page-by-page basis, depending on the level ofdifficulty involved in the photocopying, and for our otherreprographics-related services on a time and materials basis.  Our reprographic services accounted forapproximately 50%, 57% and 59% of our consolidated revenues for the years endedDecember 31, 2002, 2001 and 2000, respectively.

 

*DigitalPrinting.*  The digital printing services we offerinclude both black and white and color digital production of catalogs,brochures, postcards, stationery, direct mail, newsletters, and exhibitmaterials.  We also provide servicesancillary to these printing services, including graphic design, mailing,special finishing, storage, fulfillment, and delivery services.  Our target clients for these servicesinclude our existing imaging and reprographics clients as well as othercommercial organizations requiring print media.  Our clients typically use our digital printing services toproduce marketing, business development and similar materials.  We offer digital printing services throughour Virginia and Maryland facilities.

 

As of March 21, 2003, weowned and leased the following equipment for use in our digital printingsegment:

 

•                  four color press machines, all of which wereowned;

•                  four letterpresses, all of which were owned;

•                  one color photocopier, which was leased;

•                  four Docutech copy machines, of which threewere owned and one was leased; and

•                  four graphic design stations.

 

Our printing servicesinclude both electronic print work and print press work.  For our electronic print work, our clientstypically provide us with an electronic file of the materials to beprinted.  Although the graphic designwork is often completed by the time we receive the materials for printing, wedo have the capability to perform necessary editing, alterations and othergraphic design work on the materials to the extent required by the client.  In our print press work, the clienttypically provides us with a proof of the material to be printed.  We can perform graphic design work on theproof to the extent requested by the client. We create plates from these proofs and use these plates in our printpresses to print the required quantities of printed materials.  Although the print quality of materialscreated using the print press method is generally better than the print qualityof materials created using the electronic printing process, the electronicprinting process is generally faster than the print press process.

 

We typically charge forprinting services on a****time andmaterials****basis, depending onseveral factors, including whether the work involves electronic or print pressprinting, quantity of items printed, number of colors involved in the printing,quality of paper used and graphic design time. Our digital printing services accounted for approximately 8%, 7% and 5%of our consolidated revenues for the years ended December 31, 2002, 2001 and2000, respectively.  We began offeringdigital printing services in April 2000.

 

**Clients**

 

Our clients include lawfirms, insurance companies, healthcare organizations, non-profit organizations,accounting, consulting and finance firms and other organizations throughout theUnited States.  Our clients include manyof the largest law firms in the markets we serve. ** **No single clientaccounted for more than 10% of our consolidated revenues for any of our lastthree fiscal years.

 

The Company continues tomake progress in pursuit of business in the Federal Government sector.  Wehave begun marketing our services to several federal agencies such as theDepartment of Justice and Health and Human Services.  We have also begunmarketing our services to large government prime contractors.

 

**Competition**

 

The document and informationmanagement services industry is highly competitive. With respect to each of oursegments, 

 

5

----

 

we face competition from the following general categories ofbusinesses:

 

•                  the in-house document management capabilityof our existing and potential clients;

•                  various privately-held regional and localcompanies; and

•                  publicly-held companies such as SourcecorpInc. and Imagemax, Inc., and the document and information management servicesdivisions of larger publicly-held companies such as IKON Office Solutions Inc.,Pitney Bowes Management Services, Inc., Xerox Corp., Iron Mountain Incorporatedand Kroll Incorporated.

 

In each of our segments, wecompete primarily on the basis of price, scope and scale of technology, qualityof service, reputation for reliability, ability to handle large projects, scopeof distribution network, and client service and support.  We believe that we generally competeeffectively based on these factors, for reasons that include our competitivepricing, our capacity to handle large-volume jobs, our significant investmentsin technology and the wide range of document and information managementservices we offer to our clients.

 

**Sales andMarketing**

 

Our sales and marketingefforts target law firms, insurance companies, healthcare organizations,non-profit organizations, accounting, consulting and finance firms, variousstate and federal agencies and other information-intensive businesses ofvarious sizes.  As of March 21**,** 2003, our dedicated sales and marketingforce consisted of approximately 40 personnel, including sales managers,account executives and sales assistants. Our sales model employs a three-tieredapproach for deploying sales coverage in the geographic areas we serve. Ouraccount executives act as the primary client contacts, supported by salesassistants for larger and more complex jobs. Our sales assistants assist the accountexecutives in day-to-day matters and facilitate interaction between the clientand our production departments. We believe this model provides an effectivetraining ground for training and developing qualified account executives, andmany of our sales assistants move on to become account executives.  Our senior management alsoparticipates in our sales and marketing efforts.  We generate sales leads through referrals from clients,leveraging off the experience and relationships of our senior management team,responses to requests for proposals, strategic partnerships and alliances withcompanies that serve similar clients, advertisements in trade journals, as wellas through the marketing activities described below.  Our account executives receive a fixed salary during their firstsix to nine months of employment with us, and thereafter their compensation isentirely commission-based.

 

Our marketing strategy seeksto make existing and prospective clients aware of the range and level ofservices we provide, generate leads for our sales force and differentiate us inthe information management services industry. Our marketing strategy employs the following targeted sales andmarketing activities:

 

•                  we maintain anInternet site which describes our company and the services we offer;

•                  using our internal digital printingcapabilities, we have developed marketing materials specific to the particularindustries we target;

•                  we make telephone calls to potential clientsin targeted industries;

•                  following our award of a Federal SupplySchedule in December 2001, we have begun responding to certain requests forproposals issued by federal government agencies; and

•                  we subscribe to an number of federalgovernment industry services and belong to a number of industry organizations.  Utilizing these sources we have made anumber of client calls and have established a pipeline of new businessopportunities.

 

**ProprietaryInformation**

 

*General*

 

We regard thesystems, processes and know-how underlying our services as proprietary.  We rely primarily on a combination of tradesecrets, confidentiality agreements and contractual provisions to protect theserights.  Our executive and senior-levelpersonnel and software developers typically execute confidentiality agreementsupon employment with us.

 

*ProprietarySoftware Programs*

 

We have developed a seriesof proprietary software programs that we use for processing electronicfiles.  We have developed these programsby combining and adapting existing third-party software applications to meetthe particular needs of our business. We currently employ five full-time software developers and engage otherdevelopers on an outsourced basis, as needed. These developers maintain and upgrade our existing proprietary programsas necessary, keep track of developments in third-party software that havepotential applications in our industry and work on developing new proprietaryprograms based on available third-party software. The attributes of theproprietary programs we have developed include the capacity to:

 

6

----

 

•                  organize, print, and search electronicdocuments using unattended workstations controlled by a centralized databaseserver; and

 

•                  convert large quantities of electronicdocuments, email, and email attachments into various electronic formats, orsend them directly to high-speed printers.

 

These programs typicallywork with existing, off-the-shelf commercial software products used by many ofour clients. Used mainly in our imaging segment, these programs have helped usreduce overhead, lower our employee count, increase production capacity andincrease our profit margins.

 

*PatentedTechnology*

 

In October 1999, we obtaineda patent for our proprietary real-time invoicing and productivity analysistechnology, known as Costrax, which enables us to automate certain billing andjob tracking functions.  Given that manycurrent photocopiers and scanners have the capability to automatically recordbilling and job tracking information, Costrax is no longer material to ourbusiness.  The patent expires October21, 2017.

 

**EnvironmentalConditions**

 

We are subject to federal,state and local laws, regulations and ordinances that:

 

•                  govern activities or operations that may haveadverse environmental effects, such as discharges into the air and water andhandling and disposal practices for solid and hazardous wastes; and

•                  impose liability for the costs of cleaningup, and certain damages resulting from past spills, disposals or other releasesof solid wastes and hazardous substances.

 

We are not aware of anyadverse environmental conditions at any of the facilities we currently own oroperate or have owned or operated in the past that would be likely to have amaterial adverse effect on our business. We cannot assure you, however, that environmental liabilities will notin the future have a material adverse effect on our business or financialcondition.

 

**Employees**

 

We continuously recruit,train and offer benefits and other incentives to our personnel, in order todevelop and retain a qualified and reliable staff.  Under our training program, we train our personnel in the use andmaintenance of equipment, interpersonal skills and operating procedures. Weplace a strong emphasis on positive employee relations and engage in teambuilding exercises in furtherance of our goal. We also provide incentives, including a stock option plan, specificallydesigned to encourage and reward employee performance.

 

As of March 21, 2003, we hadapproximately 712 employees, including approximately 188 in imaging, 366****in reprographics, 20 in digital printing,40****in sales and marketing, 46 incustomer service/dispatch and 52 in corporate administrative and managementpositions.  Approximately 290****of our employees were part-time employees.  None of our employees are represented by alabor union and we consider our employee relations to be good.

 

**RiskFactors**

 

The following factors couldaffect our business, financial condition or results of operations.

 

**We mayincur substantial costs to keep pace with the latest changes in technology andclient preferences in our industry, which could materially and adversely affectour results of operations.  If we failto keep pace with these changes, our current services may become obsolete andunmarketable and we may lose clients and revenue and have difficulty attractingnew clients.**

 

The document and informationmanagement services industry is characterized by technological change, evolvingclient needs and preferences and emerging technical standards.  We have committed, and expect to commit,substantial resources to purchasing hardware, purchasing or licensing software,and training our personnel and clients in the use of new technology.  Existing or future hardware, software andother products may be able to convert or manipulate large amounts of documentsand information more cost effectively than those we currently use.  We may not be able to obtain or implementthese new technologies, or respond to these new needs, preferences andstandards, on a cost-effective or timely basis, or at all, and our failure todo so could make our current services obsolete and unmarketable, whichmay result in the loss of current and potential clients and revenue. Even if wesuccessfully adapt our services to changing technologies and clientpreferences, we may incur substantial costs in doing so, and our results ofoperations may suffer.

 

7

----

 

**If we donot effectively manage our growth, we may not be able to control our costs andeffectively serve our clients.**

 

We intend to grow byincreasing our client base, expanding into new geographic areas and selectivelyacquiring other businesses.  We cannotassure you that our geographic or other expansion efforts will be successful,and in one case, our expansion into Arizona, we determined shortly afteropening an office that the opportunities in the market were not as attractiveas we had hoped.  If our expansionstrategies are successful, we cannot be sure that our management team will beable to effectively oversee and implement our operating or growth strategies.Further, our growth will continue to place significant demands on managementand on our internal systems and controls. We cannot assure you that ourmanagement group will be able to effectively direct us through a continuedperiod of significant growth. In addition, we cannot assure you that ourcurrent systems will be adequate for our future needs or that we will besuccessful in implementing new systems or converting existing systems. If wefail to implement these new systems, procedures and controls on a timely andcost effective basis, we may not be able to serve our clients’ needs, hire andretain new employees, pursue new business, complete future acquisitions oroperate our business effectively. Any of these problems associated withexpansion could materially and adversely affect our financial condition andresults of operations.

 

**Changes inour clients’ industries, particularly the legal services industry, couldmaterially reduce the demand for our services and adversely affect our revenue.**

 

We derive our revenueprimarily from document and information intensive industries, particularly lawfirms, insurance companies, healthcare organizations, non-profit organizations,accounting, consulting and finance firms. Changes in the business activity or practices of any of these clientindustries, whether due to economic, regulatory, technological or otherdevelopments, could result in material reduction in demand for the document andinformation management services we offer and have a material adverse effect onour revenues.  In particular, anydecline in the demand for legal services, such as a decline in mergers andacquisitions activity, reduced enforcement of antitrust regulations or adecrease in lawsuits, could materially reduce the demand for our services.

 

**Theunauthorized disclosure or loss of any confidential or sensitive information inour possession could damage our reputation, adversely affect our operatingrevenues and subject us to liability.**

 

A substantial portion of ourbusiness involves the handling of documents containing confidential and othersensitive information, and we sometimes enter into confidentiality agreementswith our clients obligating us to maintain the confidentiality and security oftheir documents and information. We cannot assure you that the internalprocedures we have established will prevent unauthorized disclosures or loss ofthis confidential and sensitive information. Any unauthorized disclosures or loss of confidential or sensitiveinformation could result in adverse client reactions, including a failure topay for our services, negative publicity, loss of future business, and claimsagainst us.

 

Our insurancemay not cover all claims against us or may not adequately protect us from allliability that we may incur. Any of the occurrences described above, or thesuccess of one or more large claims against us that is not covered, or is notentirely covered by our insurance coverage, could materially and adverselyaffect our business.

 

**Anyinterruptions in our operations or services could materially and adverselyaffect our financial condition.**

 

Certain of our operationsare performed at a single location, or depend on continuous computer,electrical, and/or telephonic service. As a result, any fire, flood,earthquake, power loss, telephone service loss, problems caused by computer ortechnology issues, Internet problems or other disruption of our day-to-dayoperations affecting one or more of our facilities could materially andadversely affect our results of operations.

Although wecarry general liability insurance coverage, our insurance may not cover alllosses or liabilities that we may suffer or incur as a result of any such eventor disruption. In addition, our general liability insurance coverage may notcontinue to be available on reasonable terms or at all. Any uninsured orunderinsured loss or liability could have a material adverse effect on ourfinancial condition.

 

**Ourquarterly operating results are subject to fluctuations.**

 

Our operatingresults are likely to fluctuate over time, due to a number of factors, many ofwhich are outside of our control. In particular, since our revenue is typicallygenerated on a job-by-job basis, the timing or completion of material jobscould result in significant fluctuations in our results of operations fromperiod to period.  As a result, webelieve that comparing financial results for one period against another periodis not necessarily meaningful, and our results of operations in prior periodsshould not be regarded as an indication of our future performance.

 

**Weface intense competition in our industry. If we are unable to competesuccessfully, our business will suffer.**

 

We cannot assure you thatour clients and potential clients will outsource more of their document andinformation management needs or that such businesses will not bring in-houseservices that they currently outsource. In addition, many of our competitors have larger client bases,longer relationships with their clients, greater brand or name recognition andsignificantly larger 

 

8

----

 

staffs andfinancial, technical and marketing resources than we do.  Many of our competitors may be in a positionto devote greater resources than we can to the development, promotion and saleof their services. Certain of these competitors also operate in broadergeographic areas than we do.  In thefuture, we intend to enter new geographic areas through internal growth andacquisitions and expect to encounter significant competition from establishedcompetitors in each new area. As a result of this competition, we may beforced to lower our pricing, our revenue and growth rate may suffer and we mayface reduced operating margins and loss of market share.

 

**Ourrevenues are difficult to predict and we may not be able to reduce expenses ifour revenues decline.**

 

We typicallyenter into contracts with our clients on a job-by-job basis and we generally donot have long-term contracts with our clients. As a result, it is difficult to predict our revenues from period toperiod.  If we cannot reduce ourexpenses as necessary to compensate for unanticipated variations in the numberor size of jobs in progress, we may incur unnecessary expenses, which wouldadversely affect our profitability and financial condition.

 

**Miscalculationof the time or resources required to complete a fixed-fee engagement couldreduce the profitability of, or result in a loss on, the engagement.**

 

Weoccasionally enter into contracts with our clients on a fixed-fee,fixed-timeframe basis. If we miscalculate the resources or time needed tocomplete a fixed-fee engagement, we may need to devote additional resources tothe engagement for which we will not receive additional compensation, possiblyreducing the profitability of, or resulting in a loss on, the engagement.

 

**Potentialacquisitions may result in increased expenses, difficulties in integrating theacquired companies and diversion of management’s attention.**

 

We may attemptto grow our business, expand our service offerings and gain access to newmarkets through strategic acquisitions and investments. Diversion of ourmanagement’s attention during the acquisition process and the costs incurred inintegrating the systems and personnel of the acquired company into our existingoperations may adversely affect our results of operations.  In addition, our future profitabilitydepends on how effectively we integrate the operations and management of anycompanies we acquire.  Failure toeffectively integrate any of the companies we acquire may cause significantoperating inefficiencies and adversely affect our profitability.

 

**Our effortsto expand our business into other industries may not be successful.**

 

As part of our overallbusiness strategy, we have and will continue to make significant investments inexpanding our business into other industries. Our efforts could be unsuccessfulwhich in turn could affect the growth and expansion of our Company.

 

**If wecannot maintain our financial covenants with our financial lending institution,our ability to meet our financial obligations may be severely restricted.**

 

We currently depend onsignificant debt financing in order to meet our working capital needs.  Our debt financing is subject to certainfinancial covenants, which we may not be able to meet in the future.  If we are unable to meet these covenants,our bank may restrict our ability to borrow additional funds or call for animmediate repayment of all debt that is owed. If this were to happen we might need to seek additional sources offinancing through secondary asset based lending institutions and/or raiseadditional capital by issuing additional equity.  There is no guarantee that we would be able to obtain alternativesources of financing. Alternative sources of financing, will more than likely,be at less favorable terms than our current financing arrangements, and couldhave a material adverse effect on our results of operations and/or be dilutiveto our current shareholders.

 

**If wecannot obtain additional financing in the future on acceptable terms, or atall, we may not be able to invest in new technologies and our growth maysuffer.**

 

We may need to raiseadditional financing in the future in order to invest in new technology,equipment and training, and otherwise grow our business. We cannot be certainthat we will be able to obtain additional financing on acceptable terms, if atall, and our failure to obtain additional financing on acceptable terms couldadversely affect our growth. If we need additional capital and cannot raise iton acceptable terms, we may not be able to make capital expenditures, invest innew technologies to keep pace with changing client needs and technicalstandards, acquire additional companies, open or expand offices in the UnitedStates, hire and train additional personnel or otherwise expand or grow ourbusiness.

 

If we elect and are able toobtain additional funding through equity financing, the terms of this financingcould be dilutive to our current shareholders. We may also attempt to obtainadditional funding through debt financings. Any debt financings may containrestrictive terms that limit our operating flexibility. As a result, eitherdebt or equity financing could have a material adverse effect on our businessand financial condition.

 

9

----

 

**Ourfailure to protect or maintain our proprietary rights could cost us money,place us at a competitive disadvantage and result in loss of revenue and higherexpenses.**

 

The steps wehave taken to protect our proprietary rights may not prevent or deter someoneelse from using or claiming rights to our intellectual property.  Third party infringement or misappropriationof our trade secrets, patents or other proprietary information could cost usmoney, place us at a competitive disadvantage, require us to incur legalexpenses, distract our management and result in loss of revenue and higherexpenses. We also cannot assure you that we will be able to prevent theunauthorized disclosure or use of our proprietary know-how, systems andprocesses if any of our officers or other employees cease employment with us.In addition, although we believe that our proprietary rights do not infringe onthe proprietary rights of others, other parties may claim that we have violatedtheir proprietary rights. These claims, even if not true, could result insignificant legal and other costs and may distract our management.

 

We license most of thesoftware that we use to run our business from various vendors. If these vendorsassert claims that we, or our clients are infringing on their software orrelated intellectual property, we could incur substantial costs to defend theseclaims. In addition, if any of our vendors’ infringement claims are ultimatelysuccessful, our vendors could require us:

 

•                  to cease selling or using products orservices that incorporate the challenged software or technology;

•                  to obtain a license or additional licensesfrom our vendors; or

•                  to redesign our products and services whichrely on the challenged software or technology.

 

**AvailableInformation**

 

We maintain a website withthe address www.onss.com.  Informationcontained on our website is not included as a part of, or incorporated byreference into, this Annual Report on Form 10-K. Our Annual Report on Form10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, andamendments to these reports, are available free of charge at the Internet WorldWide Web site maintained by the Securities and Exchange Commission athttp://www.sec.gov.

 

**ITEM 2. Property.**

 

Our principal executiveoffices and Virginia production center are located at****832 North Henry Street, Alexandria, Virginia.  We own this facility, which coversapproximately 69,350****square feet,55,800 of which is available for office and production space. We also leasefacilities totaling approximately 81,150 square feet, in:

 

•                  Atlanta, Georgia;

•                  Chicago, Illinois

•                  Gaithersburg, Maryland;

•                  New York City, New York;

•                  Philadelphia, Pennsylvania;

•                  Washington, DC; and

•                  Wilmington, Delaware.

 

All of these facilities areprincipally used for operations and general administrative functions. We fromtime to time lease additional space on a short-term basis to facilitate higherworkloads and specific requests from clients. The lease terms extend betweenone and eight years and expire from 2003 to 2010.

 

Of the approximately 150,500square feet that we own and lease, approximately 21,280 square feet areutilized for our imaging segment, approximately 34,040 square feet are utilizedfor our reprographics segment, approximately 22,250 square feet are utilizedfor our digital printing segment and approximately 72,940 square feet areutilized for corporate and other purposes.

 

As of March 21, 2003, wealso operated at a client location pursuant to our remaining facilitiesmanagement contract.

 

**ITEM 3. Legal Proceedings.**

 

We are, fromtime to time, a party to legal proceedings arising in the normal course of ourbusiness. We believe that none of the legal proceedings currently outstandingwill have a material adverse effect on our business, financial condition orresults of operations or cash flows.

 

**ITEM 4. Submission of Matters To a Vote ofSecurityholders.**

 

During the fourth quarter ofthe year ended December 31, 2002, no matters were submitted to a vote of oursecurityholders.

 

10

----

 

### **PART II**

 

**ITEM5. Market for the Registrant’s Common Equity and Related Stockholder Matters.**

 

(a)                                  MarketInformation.

 

The followingtable shows the high and low sales prices per share of our common stock byquarter during 2002 and 2001. Our common stock trades on the Nasdaq Small CapMarket under the symbol “ONSS.” The Common Stock Purchase Warrants (symbol“ONSSW”) expired in July 2001, in accordance with the original terms ofissuance.  As a result, the Units(symbol “ONSSU”) comprised of two shares of Common Stock and one Common StockPurchase Warrant were no longer listed on the Nasdaq Small Cap Market.

 
|                |   | **COMMON STOCK** |   | **WARRANTS** |   | **UNITS** |   |
|---------------------|--------|------------------|--------|--------------|--------|-----------|--------|
| **Quarter  Ended:** |   | **HIGH**         |   | **LOW**      |   | **HIGH**  |   | **LOW** |   | **HIGH** |   | **LOW** |   |
| March 31, 2001      |   | $                | 2.06   |         | $      | 1.13      |   | $ | 0.28 |   | $ | 0.05 |   | $ | 5.22 |   | $ | 2.63 |   |
| June 30, 2001       |   | 2.28             |   | 1.05         |   | 0.19      |   | 0.01 |   | 4.50 |   | 2.00 |   |
| September 30, 2001  |   | 3.16             |   | 1.71         |   | 0.05      |   | 0.02 |   | 5.55 |   | 4.75 |   |
| December 31, 2001   |   | 3.65             |   | 1.83         |   | —    |   | — |   | — |   | — |   |
| March 31, 2002      |   | 3.73             |   | 2.75         |   | —    |   | — |   | — |   | — |   |
| June 30, 2002       |   | 3.49             |   | 2.85         |   | —    |   | — |   | — |   | — |   |
| September 30, 2002  |   | 3.20             |   | 2.50         |   | —    |   | — |   | — |   | — |   |
| December 31, 2002   |   | 2.48             |   | 1.35         |   | —    |   | — |   | — |   | — |   |
|                     |        |                  |        |              |        |           |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

(b)                                 Holders.

 

The number ofrecord holders of our common stock as of December 31, 2002 was 42. We believethat in excess of****1,400 beneficialowners hold such shares of common stock in depository or nominee form.

 

(c)                                  Dividends.

 

We have notpaid, and do not intend to pay dividends on our common stock.  Instead, we intend to retain our earnings tofinance the expansion of our business and for general corporate purposes. OurBoard of Directors has the authority to declare and pay dividends on the commonstock at any time, in its discretion, as long as there are funds legallyavailable for that distribution. Our line of credit with Wachovia Bankprohibits the payment of dividends without its consent.

 

(d)                                 UnregisteredSales of Securities.

 

None.

 

11

----

 

**ITEM 6. Selected Financial Data.**

 

The followingtable sets forth selected financial data of the Company. The selected financialdata presented below has been derived from the Company’s financial statementswhich have been audited by PricewaterhouseCoopers LLP for the year endedDecember 31, 2002 and Reznick Fedder & Silverman PC for the years endedDecember 31, 1998 through 2001, and should be read in conjunction withManagement’s Discussion and Analysis of Financial Condition and Results ofOperations, and the financial statements and the accompanying footnotesincluded in this Annual Report on Form 10-K.

 

**STATEMENT OF OPERATIONS DATAYEARS ENDED DECEMBER 31,**

 
|                                |   | **2002**   |       | **2001**   |   | **2000**   |   | **1999**   |       | **1998**   |   |
|-------------------------------------|--------|------------|------------|------------|--------|------------|--------|------------|------------|------------|--------|
|                                |   |       |       |       |   |       |   |       |       |       |   |
| Revenue                             |   | $          | 37,076,504 |       | $      | 39,460,153 |   | $          | 35,489,911 |       | $      | 26,670,903 |   | $ | 25,965,723 |   |
| Cost of revenue                     |   | 22,805,839 |       | 26,282,163 |   | 24,457,491 |   | 19,368,458 |       | 21,713,453 |   |
|                                |   |       |       |       |   |       |   |       |       |       |   |
| Gross profit                        |   | 14,270,665 |       | 13,177,990 |   | 11,032,420 |   | 7,302,445  |       | 4,252,270  |   |
| Sales and marketing                 |   | 4,721,970  |       | 3,567,748  |   | 3,706,762  |   | 2,703,755  |       | 2,645,776  |   |
| Administrative                      |   | 8,263,299  |       | 6,078,501  |   | 4,606,426  |   | 3,742,909  |       | 3,025,825  |   |
| Merger related costs                |   | —     |       | —     |   | 330,807    |   | —     |       | —     |   |
| Impairment of goodwill              |   | 258,107    |       | —     |   | —     |   | —     |       | —     |   |
|                                |   |       |       |       |   |       |   |       |       |       |   |
| Income (loss) from operations       |   | 1,027,289  |       | 3,531,741  |   | 2,388,425  |   | 855,781    |       | (1,419,331 | )      |
|                                |   |       |       |       |   |       |   |       |       |       |   |
| Other income (expense)              |   | (804,741   | )          | (1,286,213 | )      | (523,990   | )      | 123,158    |       | (7,282     | )      |
|                                |   |       |       |       |   |       |   |       |       |       |   |
| Income (loss) before income taxes   |   | 222,548    |       | 2,245,528  |   | 1,864,435  |   | 978,939    |       | (1,426,613 | )      |
| Income tax expense (benefit)        |   | 85,530     |       | 950,468    |   | 922,022    |   | 189,000    |       | (429,000   | )      |
|                                |   |       |       |       |   |       |   |       |       |       |   |
| Net income (loss)                   |   | $          | 137,018    |       | $      | 1,295,060  |   | $          | 942,413    |       | $      | 789,939 |   | $ | (997,613 | ) |
|                                |   |       |       |       |   |       |   |       |       |       |   |
| Earnings (loss) per share           |   |       |       |       |   |       |   |       |       |       |   |
| Basic                               |   | $          | 0.03       |       | $      | 0.25       |   | $          | 0.19       |       | $      | 0.16 |   | $ | (0.21 | ) |
| Diluted                             |   | $          | 0.02       |       | $      | 0.24       |   | $          | 0.18       |       | $      | 0.16 |   | $ | (0.21 | ) |
|                                |   |       |       |       |   |       |   |       |       |       |   |
| Weighted average shares outstanding |   |       |       |       |   |       |   |       |       |       |   |
| Basic                               |   | 5,392,266  |       | 5,145,291  |   | 4,870,825  |   | 4,838,727  |       | 4,818,220  |   |
| Diluted                             |   | 5,620,172  |       | 5,291,666  |   | 5,320,943  |   | 4,909,924  |       | 4,818,220  |   |

 
|                      |   | **AS OF DECEMBER 31,** |      |
|---------------------------|--------|------------------------|-----------|
|                      |   | **2002**               |      | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                      |   |                   |      |   |   |   |   |   |   |   |   |
| BALANCE SHEET DATA:       |   |                   |      |   |   |   |   |   |   |   |   |
| Working capital           |   | $                      | 2,328,112 |   | $ | 1,121,587 |   | $ | 260,906 |   | $ | 3,496,846 |   | $ | 3,181,400 |   |
| Total assets              |   | 25,408,760             |      | 25,158,928 |   | 28,079,231 |   | 11,649,129 |   | 10,951,210 |   |
| Current liabilities       |   | 7,188,450              |      | 7,991,460 |   | 11,501,179 |   | 3,695,246 |   | 3,326,752 |   |
| Long-term debt            |   | 6,897,100              |      | 7,030,794 |   | 8,097,810 |   | 528,687 |   | 1,169,454 |   |
| Stockholders’ equity |   | 9,885,311              |      | 9,545,315 |   | 7,852,989 |   | 6,944,019 |   | 6,135,911 |   |
|                           |        |                        |           |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**QuarterlyResults**

 

The followingtable sets forth quarterly financial data as reported by the Company on itsQuarterly Reports on Form 10-Q, for years 2002 and 2001.

 

12

----

 

ON-SITESOURCING, INC.SELECTED QUARTERLY FINANCIAL DATAUNAUDITED

 
|                              |   | **March  31,  2001** |      | **June  30,  2001** |   | **September  30,  2001** |   | **December  31,  2001** |       | **March  31,  2002** |   | **June  30,  2002** |   | **September  30,  2002** |      | **December  31,  2002** |   |
|-----------------------------------|--------|----------------------|-----------|---------------------|--------|--------------------------|--------|-------------------------|------------|----------------------|--------|---------------------|--------|--------------------------|-----------|-------------------------|--------|
| Revenue                           |   | $                    | 9,449,649 |                | $      | 10,332,382               |   | $                       | 10,609,923 |                 | $      | 9,068,199           |   | $                        | 8,850,235 |                    | $      | 10,314,192 |   | $ | 8,594,999 |   | $ | 9,317,078 |   |
| Costs and expenses                |   |                 |      |                |   |                     |   |                    |       |                 |   |                |   |                     |      |                    |   |
| Cost of revenue                   |   | 6,362,965            |      | 6,653,651           |   | 6,963,741                |   | 6,301,806               |       | 5,528,859            |   | 5,680,992           |   | 5,876,950                |      | 5,719,038               |   |
|                              |   | 3,086,684            |      | 3,678,731           |   | 3,646,182                |   | 2,766,393               |       | 3,321,376            |   | 4,633,200           |   | 2,718,049                |      | 3,598,040               |   |
| Sales and marketing               |   | 897,377              |      | 901,073             |   | 1,053,949                |   | 715,349                 |       | 1,059,805            |   | 1,321,339           |   | 1,172,087                |      | 1,168,739               |   |
| Administrative expense            |   | 1,422,004            |      | 1,652,773           |   | 1,522,702                |   | 1,481,022               |       | 1,979,447            |   | 2,182,125           |   | 2,026,176                |      | 2,075,551               |   |
| Impairment of goodwill            |   | —               |      | —              |   | —                   |   | —                  |       | —               |   | —              |   | 258,107                  |      | —                  |   |
|                              |   | 2,319,381            |      | 2,553,846           |   | 2,576,651                |   | 2,196,371               |       | 3,039,252            |   | 3,503,464           |   | 3,456,370                |      | 3,244,290               |   |
| Income (loss) from operations     |   | 767,303              |      | 1,124,885           |   | 1,069,531                |   | 570,022                 |       | 282,124              |   | 1,129,736           |   | (738,321                 | )         | 353,750                 |   |
| Other income (expense)            |   |                 |      |                |   |                     |   |                    |       |                 |   |                |   |                     |      |                    |   |
| Other income                      |   | 72,690               |      | 81,211              |   | 82,771                   |   | 86,094                  |       | 41,631               |   | 15,922              |   | 15,543                   |      | 30,778                  |   |
| Interest expense and other        |   | (397,813             | )         | (441,763            | )      | (461,545                 | )      | (307,858                | )          | (215,849             | )      | (239,184            | )      | (237,735                 | )         | (215,847                | )      |
|                              |   | (325,123             | )         | (360,552            | )      | (378,774                 | )      | (221,764                | )          | (174,218             | )      | (223,262            | )      | (222,192                 | )         | (185,069                | )      |
| Income (Loss) before income taxes |   | 442,180              |      | 764,333             |   | 690,757                  |   | 348,258                 |       | 107,906              |   | 906,474             |   | (960,513                 | )         | 168,681                 |   |
| Income tax (benefit) expense      |   | 200,000              |      | 344,100             |   | 280,575                  |   | 125,793                 |       | (12,069              | )      | 365,000             |   | (340,996                 | )         | 73,595                  |   |
| Net income (loss)                 |   | $                    | 242,180   |                | $      | 420,233                  |   | $                       | 410,182    |                 | $      | 222,465             |   | $                        | 119,975   |                    | $      | 541,474 |   | $ | (619,517 | ) | $ | 95,086 |   |
|                                   |        |                      |           |                     |        |                          |        |                         |            |                      |        |                     |        |                          |           |                         |        |  |  |  |  |  |  |  |  |  |  |  |

 

**ITEM 7. ****Management’s Discussion and Analysis of FinancialCondition and Results of Operations.**

 

This Management’s Discussionand Analysis of FinancialCondition and Results of Operations containsforward-looking statements such as our intentions, hopes, beliefs,expectations, strategies and predictions of our future activities, or otherfuture events or conditions.  Suchstatements are “forward looking statements” within the meaning of Section 27Aof the Securities Act of 1993, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended, and are intended to be covered by the safeharbors created thereby. Investors are cautioned that all forward-lookingstatements involve risks and uncertainty, including, without limitation, thefactors identified in Part I, Item 1 of this Report. Although we believe thatthe assumptions underlying the forward-looking statements contained herein arereasonable, any of the assumptions could be inaccurate, and, therefore, therecan be no assurance that the forward-looking statements included in this Reportwill prove to be accurate. In light of the significant uncertainties inherentin the forward-looking statements included herein, the inclusion of suchinformation should not be regarded as a representation by us or any otherperson that our objectives and plans will be achieved.

 

## **General**

 

On-Site wasoriginally incorporated in Virginia in December 1992, and changed its state ofincorporation to Delaware in January 1996. We began providing reprographic andfacilities management services in June 1993. In November 1996, we also began providing imaging and scanningservices.  In April 2000, we beganproviding commercial printing services utilizing digital printing technology.

 

Today, weprovide document and information management services through our facilities inthe greater Atlanta, Chicago, New York City, Philadelphia, Washington, D.C. andWilmington metropolitan areas.  We helpclients in information-intensive industries manage large volumes of documentsand information, allowing them to concentrate on their core businessoperations.  Our core clients, mainlylaw firms, typically generate large volumes of documents and information andrequire specialized processing, distribution, storage, and retrieval of thesedocuments and the information they contain. Our typical clients include law firms, insurance companies, healthcareorganizations, non-profit organizations, accounting, consulting and financefirms and other organizations throughout the United States.

 

We have three significantoperating segments including, imaging, reprographics and digital printing, eachof which is described above under “Item 1. Business.”  Our imaging servicesaccounted for approximately 39%, 29% and 27% of our consolidated revenues forthe years ended December 31, 2002, 2001 and 2000, respectively.  Our reprographic services accounted forapproximately 50%, 57% and 59% of our consolidated revenues for the years endedDecember 31, 2002, 2001 and 2000, respectively.  Our digital printing services accounted for approximately 8%, 7%and 5% of our consolidated revenues for the years ended December 31, 2002, 2001and 2000, respectively.  Segmentdisclosures are presented in Note 15 of the Notes to Financial Statementsincluded in this Annual Report on Form 10-K.

 

Prior to 2002, we alsooperated an additional segment, facilities management services, which involvedthe on-premises management of a client’s support services, including mailroomoperations, facsimile transmission, records and supply room management andcopying services.  In December2001, we terminated several contracts related to our facilities managementdivision and exited this segment. We currently have one ongoing facilitiesmanagement engagement.  Beginning withfiscal year 2002, we no longer viewed facilities management services as aseparate segment.  In the future, we donot intend to enter into traditional facilities management engagements asdescribed above.  We may however enterinto facilities managements arrangements which involve the 

13

----

 

management of electronicdocuments and other electronic information. Revenues for the year 2001 from ourfacilities management segment totaled $2.6 million and accounted forapproximately 6% of our consolidated revenues.

 

We derive ourrevenues primarily from our imaging, reprographics, and digital printingsegments.  We collect revenues fromthese segments on a per job basis. Our customers generally retain us on ajob-by-job basis.  We typically do nothave material contracts that commit a customer to use our services on along-term basis. Revenue is recognized upon completion and delivery of a job.

 

Our billing methodology forimaging services depends on the type of service provided.  For scanning and blowback printing, wetypically charge the client on a per-page basis.  For coding, we typically charge the client on a per-page basisand according to the number of fields coded on each page.  We generally charge for services involvingdata extraction, manipulation, indexing, formatting and other similar serviceson a per file basis.  For our datastorage services, we typically charge the client a fee based on the amount ofdata to be stored and length of storage, as well as licensing fees for thethird-party software applications we use to store and retrieve the data.  We generally charge for our reprographicsservices on a page-by-page basis, depending on the level of difficulty involvedin the photocopying, and for our other reprographics-related services on a timeand materials basis.  We typicallycharge for our printing services on a****timeand materials****basis, depending onseveral factors, including whether the work involves electronic or print pressprinting, quantity of items printed, number of colors involved in the printing,quality of paper used and graphic design time.

 

Revenues fromour segments vary from period to period depending on the volume and size ofwork orders received.  Our revenues canvary from period to period due to the impact of specific large jobs.  Currently, we derive our revenues primarilyfrom law firms.  Today, approximately 3%of our total revenues are recurring in nature. As we continue to diversify our service offerings and continue expandinginto other markets, including healthcare, insurance, and government, we expectthe period-to-period fluctuations in our revenues to decrease.

 

Cost of revenueincludes expenses related to compensation and benefits to employees, occupancycosts, equipment costs, supplies, and other costs, which are directly relatedto providing goods and services to our clients.

 

Sales andmarketing expense includes commissions, salaries, travel and entertainment andother costs related to our sales staff.

 

Administrativeexpense consists primarily of compensation and related benefits to executivemanagement, accounting, human resources, and other administrative employees,communications costs, insurance costs, legal and accounting professional fees,and other costs incurred to provide support to our operating segments.

 

## **Recent Events**

 

In January 2002, the Company completed the relocation of its Arlington,Virginia production facilities and headquarters to Alexandria, Virginia. TheCompany purchased the property in Alexandria, Virginia in November 2000, for atotal purchase price of approximately $7.5 million, including a cashexpenditure of approximately $1.7 million and a related mortgage ofapproximately $5.8 million. As a result of holding the Alexandria propertyduring 2001 in addition to leasing its Arlington location, the Company incurredsignificant costs for maintaining both locations.

 

## **Significant Developments – Fiscal Year 2002**

 

During 2002,the Company opened several new offices around the country.  Offices were opened in the financialdistrict of New York City in February and in the downtown area of Washington,DC in May.  As these offices are locatedcloser to some of our clients, it gives us the ability to be competitive onsmaller jobs which often require faster turn-around times.  In August, offices were opened in Chicago,Illinois and Wilmington, Delaware.  TheWilmington office, focusing primarily on legal copy services, serves as a smallproduction center to serve  key accountsin the area with a faster, more efficient turn-around time, as well as to makeour services available to new clients in the area.  The Chicago office is focusing on providing both imaging andreprographic services.

 

In July 2002,the Company hired Mary Ann Mayhew as Executive Vice President of Government andProfessional Services.

 

In October2002, Brian Leydet who served as the Company’s Executive Vice President ofOperations terminated employment with the Company.  Martin Lauzze who previously served as Regional Vice Presidentreplaced Mr. Leydet.  As expectedrevenue growth did not materialize, the position of Regional Vice President ofOperations was eliminated.

 

## **Significant Developments -  Fiscal Year 2001**

 

## **During October 2001, the Company opened an office in Tempe,Arizona.  The opening of the Arizonaoffice was consistent with the Company’s strategy of geographic expansion.  The Arizona office was expected to providesignificant additional selling**

## ** **

14

----

 

## **opportunities and allow for market penetration into theWest Coast.  In October 2002, theCompany ceased production at its facility in Arizona as a result of a strategicdecision to focus on larger geographic markets for growth, and to minimizecurrent losses.**

 

In December 2001, the GSAawarded the Company a Federal Supply Schedule, which is effective until January2006.  Federal Supply Schedules arecentralized, government-wide acquisition contracts negotiated and awarded bythe GSA.  Under our Federal SupplySchedule, any U.S. federal government agency can procure services directly fromus.  We have begun marketing ourdocument and information management services to document-intensive federalagencies.  On-Site’s GovernmentServices division has developed a pipeline of new business opportunities. Todate, a number of proposals have been submitted to various state and federalgovernment agencies, as well as to federal government prime contractors. Manyof these opportunities represent potential multi-year contracts. However, manyof the contract awards have not been made due to delays in approval of thegovernment’s budget. To date,revenues derived under the GSA schedules are minimal.

 

**Results of Operations**

 

***YearEnded December 31, 2002 Compared with the Year Ended December 31, 2001***

 

# **Revenue**

 

Revenue decreased approximately $2.3 millionor 6.0%, from approximately $39.5 million in 2001 to approximately $37.1million in 2002.  The Company generatesa large percentage of its revenue from law firms, which typically engage inlarge transactional matters involving mergers and acquisitions.  As a result of a weak economy, which in turnresulted in a significantly lower level of merger and acquisition activities,the Company experienced a lower than expected amount of revenue in itsreprographic and imaging segments. Revenue and changes by segment are as follows:

 

Imaging revenue increased approximately $3.0million or 26.6%, to approximately $14.4 million in 2002.  Digital printing revenue increasedapproximately $76,000 or 2.6%, to approximately $3.0 million in 2002.  Reprographic revenue decreased approximately$3.9 million or 17.2%, from approximately $22.6 million in 2001.

 

The shift of revenue from the reprographicsto the imaging segment was expected by management as clients are moving awayfrom the traditional paper-based documents to the use of electronic files anddocuments.  The imaging segment of our Companycontinues to play an important role in the Company’s growth andprofitability.  As we expect the revenuefrom the imaging segment to continue to grow, we expect overall demand for ourreprographic services within the existing markets and clientele, primarily lawfirms, to decline. We expect to offset this decline by generating additionalreprographics revenue in the government and commercial sectors.

 

# **Gross Profit**

 

Gross profit increased approximately $1.1million, or 8.3%, to $14.3 million in 2002. Gross profit as a percentage of sales increased from 33.3% in 2001 to38.5% in 2002.  The increase isattributable in part to continued efforts of management to increase theutilization of part-time workers, as opposed to full-time workers to handlepeak demand periods.  The increase inthe percentage of revenue from the imaging segment also contributed to theincreased gross profit in 2002 as compared to 2001, as the profit marginsattributable to the imaging segment are higher than those of the other segmentsof the Company.  The implementation ofsoftware applications that automatically format and print emails, attachments,and other file types contributed to the lower cost of revenue and highermargins, for the imaging segment. Increased revenue and cost-cutting procedures in the Company’s digitalprinting division also contributed to the increase in gross profit.  The digital printing division incurred aloss of approximately $477,500 in 2002 as compared to a loss of approximately$734,500 in 2001, due to increased revenue and cost cutting measures.  As the digital printing operations becomeprofitable, the Company expects that this will have a favorable impact on grossprofit.

 

# **Sales and Marketing Expense**

 

Sales and marketing expense increasedapproximately $1.2 million, or 32.4%, to approximately $4.7 million in 2002from approximately $3.6 million in 2001. Sales and marketing expense as a percentage of sales increased from 9.0%in 2001 to 12.7% in 2002.  Sales andmarketing expense primarily consists of sales commissions, salaries and relatedcosts, travel and entertainment, and other costs related to our salesstaff.  Commissions to our accountsexecutives are paid on an individual job-by-job basis, depending onprofitability of the particular job. Sales expense fluctuates with the number of “house” account sales, onwhich no commissions are paid, and “commissioned” accounts on which commissionsare paid.

 

In June 2001, the Company terminated itsformer non-commissioned Sales and Marketing Director.  All accounts associated with the former employee have been passedon to commissioned sales representatives, causing commission expense to behigher in 2002 than in 2001.  Theincreased revenue associated with the imaging segment in 2002, as compared to2001, caused commission 

 

15

----

 

expense to increase as the commission rates on imaging services aregenerally higher, due to higher gross margin achievement on imaging jobs.

 

Since January 1, 2002, the Company has hired14 new account executives and three national sales representatives.  This caused sales salaries to increase asnew account executives are paid a base salary during their initial term ofemployment, generally six to nine months, after which they are on straightcommission. In August 2002, the Company terminated its national account programas the program was not successful.  As aresult, the three national accounts executives were terminated.

 

**AdministrativeExpenses**

 

Administrative expenses increasedapproximately $2.2 million or 35.9%, to approximately $8.3 million in 2002 fromapproximately $6.1 million in 2001. General and administrative expenses as a percentage of sales increasedfrom 15.4% in 2001 to 22.3% in 2002. Significant factors that contributed to the increased expense includethe following:

 

•                  Administrative salariesand wages were approximately $3.8 million in 2002, an increase of approximately$849,000 from 2001.  This increase isdue to the hiring of several highly compensated employees at the executive,human resources and manager levels, along with the opening of offices in twonew cities.  Several of these employeeswere no longer employed with the Company as of December 31, 2002 and as aresult, we expect the administrative salaries and wages expense to decrease in2003.

 

•                  Approximately $506,000of the 2002 administrative expense, an increase of approximately $285,000 ascompared to 2001, consisted of bonus payments awarded to divisionalmanagers.  Effective January 1, 2002,the Company adopted a new bonus plan designed to award employees for meetingcertain goals and expectations.

 

•                  Approximately $786,000of the 2002 administrative expense consisted of depreciation expense, anincrease of approximately $331,000 as compared to 2001.  The increase is due to an increase indepreciation costs related to the purchase of computer and other informationtechnology equipment, office equipment, and capital improvements made to ourcorporate headquarters during the year.

 

•                  Approximately $274,000of the administrative expense in 2002, an increase of approximately $173,000 ascompared to 2001, is due to increased travel by executive and management levelemployees for training activities, and to monitor and improve the operations ofthe various production facilities.

 

•                  The initial costs toopen the new offices, and the additional monthly costs associated with theseoffices contributed to the increased general and administrative expense for2002.

 

**Impairment of Goodwill**

 

During thequarter ended September 30, 2002, as a result of continued unfavorable marketconditions, a business unit in the digital printing segment experienced greaterthan anticipated losses.  As a result,the Company revised its financial forecast for the business unit and determinedthat an impairment assessment of the goodwill associated with this unit waswarranted.  As a result of theimpairment analysis, the Company concluded that the carrying amount of goodwillwas not recoverable and has written off the full amount of $258,107.  This charge was recorded within the digitalprinting segment and has been included in the impairment charge in theStatements of Operations.

 

**OtherIncome and Expense**

 

#### Other incomedecreased approximately $219,000 from approximately $323,000 in 2001 toapproximately $104,000 in 2002.  Thehigher other income in 2001 was attributable to rental income generated fromsubletting portions of the building purchased by the Company in Alexandria,Virginia.  During 2002, as a result ofoccupying the property for its corporate headquarters and Virginia productioncenter starting January of 2002, the Company did not earn significant amountsof rental income, which was previously derived from subletting certain portionsof the property.

 

Other expensedecreased approximately $345,000 from approximately $414,000 in 2001 toapproximately $69,000 in 2002.  Otherexpense includes losses incurred as a result of disposal of certain fixedassets, and in 2001 included expenses related to the maintenance and managementof the Alexandria, Virginia property. As the property was used in 2002, and continues to be used as theCompany’s headquarters, the expenses incurred in maintaining the property areincluded as part of the Company’s operating expenses in 2002.

 

Interestexpense decreased approximately $355,000 from approximately $1.2 million in2001 to approximately $840,000 in 2002. The decrease is due to reduced overall market rates of interest relatedto borrowings under credit agreements and certain other 

 

16

----

 

current debt arrangements andlower utilization of the Company’s line of credit.  The Company’s line of credit balance as of December 31, 2002 was$2,861,414 compared to $3,120,166 as of December 31, 2001.

 

**IncomeTaxes**

 

For the year ended December31, 2002 the Company recorded total income tax expense of $85,530 compared toincome tax expense of $950,468 for the year ended December 31, 2001.  The Company’s effective income tax rateswere 38.4% and 42.3% for 2002 and 2001, respectively.  The decrease in the effective rate was due to the adjustment ofdeferred tax assets and liabilities in the current year.

 

***YearEnded December 31, 2001 Compared with the Year Ended December 31, 2000***

 

**Revenue**

 

Revenuesincreased $4.0 million or 11%, to $39.5 million in 2001 from $35.5 million in2000.  The increase resulted from anincrease in demand for our services in all three of our business segments as aresult of hiring additional sales staff and additional market penetration intolegal, insurance, and heath care markets. The revenue increase in 2001 was offset by a general decrease in demandfor our services immediately following the September 11, 2001 terroristattacks.  Revenue increases by segmentare as follows:

 

Digitalprinting revenues increased $1.1 million or 60% to $3.0 million from $1.9million in 2000.  Imaging  revenues increased $1.9 million or 20% to$11.4 million from $9.5 million in 2000. Reprographics revenues increased $1.5million or 7% to $22.6 million from $21.1 million in 2000.

 

The imagingsegment, which accounted for 29% of our revenue in 2001, played an importantrole in the Company’s future growth. As the needs of our clients shift fromtraditional reprographic document management solutions to more technology-basedsolutions, we expect imaging revenues as a percentage of total Company revenuesto increase.  In the future, as clientsshift to imaging, we expect a decrease in reprographic revenues.

 

**GrossProfit**

 

Gross profitincreased $2.1 million, or 19%, to $13.2 million in 2001 from $11.0 million in2000, largely due to the increases in revenue and improvements in gross profitmargins.  Gross profit as percentage ofsales increased from 31% in 2000 to 33% in 2001. The increase is attributablein part to improved management of our labor force by increasing utilization ofpart-time workers, compared to full-time workers, to handle peak demandperiods. As a result, the Company incurred significantly lower labor costs, asa percentage of revenues, in 2001 compared to 2000.  Other factors contributing to the increase in gross profitinclude higher profit margins attributable to the Company’s imaging segment,which accounted for a higher percentage of total revenues in 2001 compared to2000, as compared to margins in our reprographics and digital printingsegments, and efficiencies achieved as a result of spreading increased revenuesover certain fixed costs.  Gross profitwas negatively impacted by a loss of $734,486 incurred in the Company’s digitalprinting operations.

** **

**Salesand Marketing Expense**

** **

Sellingexpense as a percentage of revenues decreased from 10% in 2000 to 9% in2001.  The decrease is attributable to alarger percentage of “house” accounts, or accounts under which no accountexecutives are assigned, on which no commissions are paid.

 

**AdministrativeExpense**

 

Administrativeexpense increased $1.5 million to $6.1 million in 2001 compared to $4.6 millionin 2000.  This increase is due to thesignificant investments in people and equipment we made in 2001 in order toprepare for anticipated future growth. Key factors which contributed to the increase include the following:

 

•                  Approximately$700,000 of our 2001 administrative expenses consist of increases inadministrative salaries and wages as a result of the two acquisitions completedduring the second and third quarter of 2000, additional administrativepersonnel hired to support the growth and the expansion of our imaging servicesto Georgia and New York, and additions of corporate administrative andmanagement personnel;

 

•                  Approximately $240,000of our 2001 administrative expenses related to a severance payment to ourformer Director of Sales & Marketing who resigned in May 2001;

 

17

----

 

•                  Approximately$220,000 of our 2001 administrative expenses consisted of bonus payments, usedto reward and motivate employees for meeting certain performance objectives;and

 

•                  Approximately$165,000 of our 2001 administrative expenses consisted of increases indepreciation costs related to the purchase of computer and other informationtechnology equipment used to manage our computer network and processadministrative functions in our imaging and digital printing segments and ouraccounting and human resources departments.

 

**MergerRelated Costs**

 

In July 2000, theCompany signed a definitive merger agreement with U.S. Technologies Inc.pursuant to which U.S. Technologies would acquire the Company. As a result ofentering into the merger agreement, the Company incurred expenses of $330,807,including legal fees and costs associated with the preparation of a fairnessopinion directly related to the due diligence of the transaction. The mergeragreement expired on March 31, 2001.  OnApril 2, 2001 the Company exercised its option to terminate the mergeragreement.

 

**OtherIncome and Expense**

 

Other incomeincreased by $234,715 to $322,766 in 2001 from $88,051 in 2000.  The increase is primarily due to rentalincome in the amount of $277,244 for 2001 as a result of subletting theproperty purchased in Alexandria, Virginia.  In January 2002, the Companyrelocated its Virginia production center and headquarters to this Alexandriafacility.

 

Other expense,including other expense and interest expense, increased by $996,938 to $1.6million in 2001 from $612,041 in 2000.  Other expense is comprised ofinterest expense, loss on disposal of assets and expenses related to theAlexandria, Virginia property:

 

•                  Interest expense(excluding mortgage expense, which is separately discussed below) increased by$222,209 to $637,445 in 2001 from $415,236 in 2000.  $161,522 of the increase is due to higher utilization of theCompany’s line of credit in 2001, and $60,686 of the increase is due toadditional financing arrangements entered into by the Company in connectionwith the acquisition of digital printing equipment in 2000.

 

•                  Loss on disposalof assets totaled $141,531 for 2001 compared to $86,185 in 2000.  The 2001 disposals related to the write-offof certain non-performing fixed assets.

 

•                  The Companyincurred $830,003 and $88,510, in 2001 and 2000, respectively, in expensesrelated to the Alexandria, Virginia property. Of these amounts, $557,591 and$66,403, respectively, represented interest expense incurred in connection withthe mortgage on the property.  The remaining amounts, $272,412 and$22,108, respectively, were expenses related to the ownership and maintenanceof the property.  For the year ended December 31, 2002, expenses incurredin maintaining the property were included as part of the Company’s operatingexpenses.

 

**Recent Accounting Pronouncements**

 

In July 2001, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards No. 141, “Business Combinations”(SFAS No. 141) and SFAS No. 142, “Goodwill and Other Intangible Assets” (SFASNo. 142).  SFAS No. 141 requiresbusiness combinations initiated after June 30, 2001 be accounted for using thepurchase method of accounting, and broadens the criteria for recordingintangible assets separate from goodwill. Recorded goodwill and intangibles will be evaluated against these newcriteria and may result in certain intangibles being reclassified intogoodwill, or alternatively, amounts initially recorded as goodwill may beseparately identified and recognized apart from goodwill. SFAS No. 142 requiresthe use of a non-amortization approach to account for purchased goodwill andcertain indefinite-lived intangibles. Under a non-amortization approach, goodwill and indefinite-livedintangibles will not be amortized into results of operations, but instead wouldbe reviewed for impairment and written down and charged to results ofoperations only in the periods in which the recorded value of goodwill andcertain intangibles is more than its estimated fair value.  The provisions of the two statements thatapply to goodwill were adopted by the Company on January 1, 2002. The adoptionof the standards on January 1, 2002 did not have a material impact on theCompany’s financial position, results of operations, or cash flows.

 

The FASB alsorecently issued SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets” (SFAS No. 144) that is applicable to financial statementsissued for fiscal years beginning after December 15, 2001. The FASB’s new ruleson asset impairment supersede SFAS No. 121, “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to Be Disposed Of” and portions ofAccounting Principles Bulletin Opinion No. 30, “Reporting the Results ofOperations.” This Standard provides a single accounting model for long-livedassets to be disposed of and significantly changes the criteria that would 

 

18

----

 

have to be met to classify anasset as held-for-sale. Classification as held-for-sale is an importantdistinction since such assets are not depreciated and are stated at the lowerof fair value and carrying amount. This Standard also requires expected futureoperating losses from discontinued operations to be displayed in the period(s)in which the losses are incurred, rather than as of the measurement date aspresently required. The adoption of this Standard at January 1, 2002 did nothave a material effect on the Company’s financial position, results ofoperations or cash flows.

 

In August 2002, the FASB issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities” (SFAS No. 146).  It addresses financial accounting andreporting for costs associated with exit or disposal activities and nullifiedEmerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requiresthat a liability for a cost associated with an exit or disposal activity berecognized when the liability is incurred and establishes that fair value isthe objective for initial measurement of the liability.  Under EITF Issue No. 94-3, a liability foran exit cost is recognized at the date of an entity’s commitment to an exit plan.  The new standard is effective for exit ordisposal activities that are initiated after December 31, 2002.  The Company does not believe SFAS No. 146will have a material effect on the Company’s financial position,  results of operations or cash flows.

 

In November2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others” (FIN 45). FIN 45 requires that upon issuance of aguarantee, a guarantor must recognize a liability for the fair value of anobligation assumed under a guarantee. FIN 45 also requires additionaldisclosures by a guarantor in its interim and annual financial statements aboutthe obligations associated with guarantees issued. The recognition provisionsof FIN 45 are effective for any guarantees issued or modified after December31, 2002. The disclosure requirements are effective for financial statements ofinterim or annual periods ending after December 15, 2002. The adoption of FIN45is not expected to have a material effect on the Company’s financial position,results of operations, or cash flows.

 

In December2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation —Transition and Disclosure” (SFAS No. 148). SFAS No. 148 amends SFAS No. 123“Accounting for Stock-Based Compensation” (SFAS No. 123) to provide alternativemethods of transition for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation. In addition, SFAS No. 148amends the disclosure requirements of SFAS No. 123 to require prominentdisclosures in both annual and interim financial statements about the method ofaccounting for stock-based employee compensation and the effect of the methodused on reported results. SFAS No. 148 is effective for fiscal years beginningafter December 15, 2002. The interim disclosure provisions are effective forfinancial reports containing financial statements for interim periods beginningafter December 15, 2002. The Company does not expect the adoption of SFAS No.148 to have a material effect on its financial position, results of operations,or cash flows.

 

# **Liquidityand Capital Resources**

 

We have funded our expansion by utilizing internally generated cashflow, long term financing, and a short-term commercial line of credit. Forour short-term liquidity, we rely on our line of credit, the availability ofwhich depends on the Company’s accounts receivable balances, and cash flowsfrom operations.  The Company may experiencean inability to meet its capital requirements if any one or a combination ofthe following occur: significant losses from operations, significant decreasein revenues, default of certain line of credit covenants, causing the line ofcredit to be due on demand, or the default by customers, or a group ofcustomers, with significant accounts receivable balances owed to the Company.

 

We anticipate the cash flow from operations and credit facilities willbe sufficient to meet the expected cash requirements for the next twelvemonths. There can be no assurances that unforeseen events may not require moreworking capital than we have at our disposal. In order to meet its capital requirements, the Company may seek additionalsources of financing.  These may includecollateral-based loans, capital leases, and operating leases.

 

As of December 31, 2002 we had approximately $4,300 in cash and workingcapital of approximately $1.9 million. In order to assure additional working capital is availableto fund our operations, we had available a $7,000,000 working capital line ofcredit as of December 31, 2002.  The Company has the capacity to borrow,at any given time, the lesser of the established line of credit or eligibleaccounts receivable, generally defined as 75% of accounts receivable that areless than 120 days old.  As of December 31, 2002 we had availableapproximately $2.6 million under the line of credit.  The working capital line of credit bears interest at the lesserof the bank’s prime rate of interest or the 30-day LIBOR plus 2.20%.  On March 24, 2003 the Company renewed theline of credit agreement to extend the maturity of the credit line to May 31,2004.

 

At December 31, 2002, the Company had a mortgage note payable(Mortgage) with a carrying amount of $5,413,869.  The mortgage was to fund the purchase of the Alexandria, Virginiaproperty.  In order to manage interestcosts and exposure to changing interest rates on the mortgage loan, the Companyentered into an interest rate swap agreement in which the interest rate isfixed at 9.48%.  Under the terms of thenote and related interest rate swap agreements, the Company is required to makemonthly principal and 

 

19

----

 

interestpayments in the aggregate of $60,495 for a period of seven years, and alump-sum payment of $4,155,254 when the note becomes due in October 2007.

 

In September2002, the Company entered into a note payable in the amount of $1,250,000 (theNote).  The note was obtained to createadditional borrowing capacity, in the event it is needed, under the currentline of credit agreement.  Under theterms of the Note, the Company is required to make monthly principal andinterest payments in the aggregate of $34,722 for a period of three years.  The unpaid principal amount bears interest ata fluctuating annual rate equal to the 1 - Month LIBOR plus 2.50%.

 

The Companyhas obtained financing for certain equipment (Equipment Financing) in theaggregate amount of  $1,780,300 as ofDecember 31, 2002.  The underlying notesare secured by the underlying equipment and accrues interest at the rate of the30-day LIBOR plus 2.50% and matures in August 2006.

 

The Mortgage,the Note, the Equipment Financing, and the line of credit arrangements wereobtained from the same bank.  As ofDecember 31, 2002 the total borrowing from the bank was $10,731,590.  The underlying agreements related to thesedebt provide a cross-default protection provisions to the lender and requirecertain financial covenants.  A significantcovenant requires the Company to maintain an Interest Coverage Ratio, asdefined, in excess of 2.0:1.  For thequarters ended March 31, 2002 and June 30, 2002 the Company was in compliancewith the Interest Coverage Ratio. During the quarter ended September 30, 2002,due to a significant quarterly net loss, the Company was not in compliance withthis covenant.  As a result, the Companyobtained a waiver of the covenant for the third and fourth quarters of 2002.  The Company met all other financial covenantsthroughout the year in 2002 and was in compliance with all covenants atDecember 31, 2002.  During the firstquarter of 2003, the bank modified the Interest Coverage Ratio to be 1.75:1 forthe quarters ended March 31, 2003 and June 30, 2003, after which the ratioreverts back to 2.0:1. The modification also allows the exclusion of certaincharges, deemed as one time in nature, from the computation of the InterestCoverage Ratio, with advance approval from the bank.  The Company has received approval to exclude charges related tothe results of the closed Arizona office, and the write-off of goodwill relatedto the Company’s digital printing division. The Company expects to remain in compliance with all of the covenantswithin the next twelve months following December 31, 2002.  In the event the Company is not incompliance with debt covenants, the bank has the right to call for immediatepayments on some or all debt borrowings covered under the debt agreements withthe bank. If such an event were to occur, the Company may be forced to seekalternative sources of funding.  TheCompany does not believe such an event is likely to occur.

 

The following summarizes, as of December 31, 2002, our obligations andcommitments to make future payments (principal and interest) under contracts,including debt and lease arrangements. We expect to fund such obligations from cash generated from operatingactivities and funding from our line of credit.

 
|                               |   | **Scheduled Debt Repayments** |       |
|------------------------------------|--------|-------------------------------|------------|
| **Contractual  Obligations**       |   | **Total**                     |       | **Less than  1 Year** |   | **1-3  Years** |   | **4-5  Years** |   | **After 5  Years** |   |
| Line of Credit                     |   | $                             | 2,861,414  |   | $ | 2,861,414 |   | $ | — |   | $ | — |   | $ | — |   |
| Mortgage                           |   | 7,663,965                     |       | 725,940 |   | 2,177,820 |   | 4,760,205 |   | — |   |
| Other Long-Term Debt               |   | 2,648,470                     |       | 873,842 |   | 1,774,628 |   | — |   | — |   |
| Lease Commitments                  |   | 7,076,362                     |       | 2,150,376 |   | 3,957,411 |   | 696,347 |   | 272,228 |   |
| Total Contractual Cash Obligations |   | $                             | 20,250,211 |   | $ | 6,611,572 |   | $ | 7,909,859 |   | $ | 5,456,552 |   | $ | 272,228 |   |

 

Net cash flowfrom operating activities decreased by approximately $3.3 million from approximately$5.5 million in 2001 compared to approximately $2.2 million in 2002.  Key factors which contributed to thedecrease include the following:

 

•                  Net income for2002 decreased from the comparable period in 2001 by approximately $1.2million.

•                  2001 cash flowswere positively affected by approximately $1.7 million as a result of anoverall decrease in Accounts Receivable balances from December 31, 2000 toDecember 31, 2001. Accounts Receivable balances from December 31, 2001 toDecember 31, 2002 increased slightly.

•                  Accounts Payablebalances decreased by approximately $772,000 from December 31, 2001 to December31, 2002 as a result of the Company taking advantage of early paymentdiscounts.

 

Net cash flowsused in investing activities increased approximately $380,000 to approximately$2.4 million in 2002 compared to approximately $2.0 million in 2001.  The increase is due to capital expendituresfor improvements to the Company’s new Alexandria, VA office and purchases ofequipment, including high-value data storage equipment for use in our imagingsegment.  The Company anticipates thatfuture requirements for capital expenditures will include capital expendituresincurred during the ordinary course of business, including costs related to ouranticipated geographic expansion, investment in high-end data storageequipment, and improvements related to our Alexandria, Virginia facility. Weanticipate our capital expenditures for 2003 will be between $1.5 million

 

20

----

 

and $2.0 million.  We expect to fund such capital expenditureswith cash generated from operating activities and funding from our line ofcredit. We currently do not have plans to enter into any financing type arrangements.

 

**CriticalAccounting Policies and Significant Estimates**

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires estimates andassumptions that affect the reported amounts of assets and liabilities, revenueand expenses, and related disclosures of contingent assets and liabilities inthe financial statements and accompanying notes.  The U.S. Securities and Exchange Commission has defined acompany’s most critical accounting policies as the ones that are most importantto the portrayal of the Company’s financial condition and results ofoperations, and which require the Company to make its most difficult andsubjective judgments, often as a result of the need to make estimates ofmatters that are inherently uncertain. Based on this definition, we have identified the critical accountingpolicies and judgments addressed below. Although we believe that our estimates and assumptions are reasonable,they are based upon information presently available.  Actual results may differ significantly from these estimatesunder different assumptions or conditions.

 

**RevenueRecognition**

 

Revenue isprimarily derived from providing imaging, reprographics, and digital printingservices, and prior to 2002, facility management services.  The Company recognizes revenue from servicesrendered when the following four revenue recognition criteria are met:persuasive evidence of an arrangement exists, services have been rendered ordelivery has occurred, the selling price is fixed or determinable, andcollectibility is reasonably assured. Return and bad debt allowances are estimated based on specificidentification and historical information.

 

Reprographicservices involve the copying and management of large amounts of documentsextracted in their original format from the offices and files ofcustomers.  A typical job ranges in sizefrom single documents with a small number of pages to multiple sets ofdocuments, which can exceed a million pages. Reprographic services are generally invoiced upon delivery, on ajob-by-job basis and based on the number of copies and the level of difficultyin copying the original documents.

 

Imagingservices are provided primarily to law firms, which often need to search andretrieve documents in a timely and efficient manner.  Imaging services involves the conversion or transfer oftraditional paper and electronic documents into electronic media or vice-versa,and include scanning of documents, converting email, attachments and otherelectronic files to images, indexing or coding, optical character recognition,electronic document search and retrieval services, and blowback printing.  Imaging services are typically invoiced on ajob-by-job basis, based on the number of images and complexity of the retrievalapplications, and upon delivery of electronic media such as CD-ROM.

 

Digitalprinting services include both black and white and color digital production ofcatalogs, brochures, postcards, stationery, direct mail, newsletters, andexhibit materials, and are provided to all organizations requiring printmedia.  Printing jobs are typicallyinvoiced on a job-by-job basis depending on several factors, includingquantity, number of colors, quality of paper, and graphic design time.

 

Facilitiesmanagement services include on-premises management of customer’s supportservices, including mailroom operations, facsimile transmission, records andsupply room management and copying services. Revenue on facility management services is recognized on a monthly basisover the contract term (typically one year) as services are performed.  Revenue generated from facilities managementservices was not material during 2002.

 

Included in “Accounts receivable, net” on our Balance Sheets is anallowance for doubtful accounts.  Ourcustomers primarily consist of the largest law firms in the United States.  Senior management reviews the accountsreceivable aging on a monthly basis to determine if any receivables willpotentially be uncollectable.  After allattempts to collect the receivable have failed, the receivable is written offagainst the allowance.  Based on theinformation available to us, we believe our allowance for doubtful accounts asof December 31, 2002 is adequate. However, no assurances can be given that actual write-offs will notexceed the recorded allowance.

 

**Goodwill**

 

Effective January 1, 2002, the Company adopted the full provisions ofSFAS No. 142.  In accordance with SFASNo.142, the Company records impairment losses on goodwill when events andcircumstances indicate that such assets might be impaired and the estimatedfair value of the asset is less than its recorded amount. Conditions that wouldnecessitate an impairment assessment include material adverse changes inoperations, significant adverse differences in actual results in comparisonwith initial valuation forecasts prepared at the time of acquisition, adecision to abandon acquired products, services or technologies, or othersignificant adverse changes that would indicate the carrying amount of therecorded asset might not be recoverable.

 

21

----

 

At adoption, the Company determined the recorded goodwill to bebusiness-unit level goodwill and assessed the fair value of such asset based ondiscounted cash flow analysis at the business-unit level, using the Company’sown assumptions, and determined no impairment occurred.

 

During thequarter ended September 30, 2002, as a result of continued unfavorable marketconditions, a business unit in the Digital printing segment experienced greaterthan anticipated losses.  As a result,the Company revised its financial forecast for the business unit and determinedthat an impairment assessment of the goodwill associated with this unit waswarranted.  As a result of theimpairment analysis, the Company concluded that the carrying amount of goodwillwas not recoverable and has written off the full carrying amount of$258,107.  This charge was recordedwithin the Digital printing segment and has been included in the impairmentcharge in the Statements of Operations. In assessing the fair value of the business unit, the Company used thediscounted cash flows method based on the following assumptions: 1)thefinancial projection for the operating unit, assuming certain revenue growthrate and costs model, and 2) the estimated discount rate.  If management made different judgmentsregarding future performance, the amount of the impairment could differ fromthe recorded amount.

 

**DerivativeInstrument and Hedging Activity**

 

The Company uses an interest rate swap to convert its variable-rateinterest payments on its mortgage ($5,413,869 at December 31, 2002) tofixed-rate interest payments. This interest rate swap was designated as acash-flow hedge and qualified for the short-cut method of assessingeffectiveness under SFAS No. 133 , “Accounting for Derivative Instruments andHedging Activities” (SFAS No. 133).

 

SFAS No.133requires the Company to carry all derivative financial instruments on thebalance sheet at fair value.  Fair valueis obtained from the lending institution on a quarterly basis, and is based oninterest rates at the inception of the hedge, current interest rates, andremaining time period until maturity on the underlying debt. Changes in fairvalue of effective cash flow hedges are recorded as a component of Other Comprehensive Income (Loss) until thehedged transaction occurs, which at that time is recognized in earnings(loss).

 

The Companydid not record the cumulative effect of adopting SFAS No. 133 as of January 1,2001, as the Company considered the impact at adoption to be immaterial to itsfinancial statements.  The Company alsodid not record the effects of changes in the estimated fair value of theinterest rate swap during 2001 as the Company considered the effects to beimmaterial to its financial statements.

 

During thefirst quarter of 2002, given the continued decline in market interest rate, theCompany measured the fair value of the interest rate swap and as a result,recorded interest rate swap liability of $434,000, which was the estimated fairvalue of the interest rate swap, along with an unrealized after-tax loss of$265,000 in other comprehensive loss, which is a component of stockholders’equity.  As of December 31, 2002, theCompany carried a non-current interest rate swap liability of $913,306 and  an unrealized after-tax loss of $551,545 inother comprehensive loss.  The Companyassumes the hedged transaction will occur during the term of the underlyingagreement.  Results of operations may bematerially affected if such transaction were not to occur.

 

**Long-livedAssets**

 

Long-lived assets (primarily property and equipment) are reviewed forimpairment whenever events or changes in circumstances indicate the carryingamount of the assets might not be recoverable. The Company views the followingas conditions that necessitate impairment: a significant decline in theobservable market value of an asset, a significant change in the extent ormanner in which an asset is used, or a significant adverse change that wouldindicate that the carrying amount of an asset or group of assets is notrecoverable. For long-lived assets to be held and used, the Company measuresfair value based on quoted market prices, discounted estimates of future cash flowsor other methods. For the twelve months ended December 31, 2002, the Companydid not note any events or changes in circumstances indicating the carryingamount of long-lived assets were not recoverable.  The carrying amount of long-lived assets is based on management’sjudgment as to estimated future performance of the business.  Changes in judgments regarding futureperformance may lead to a different result.

 

**RestructuringCosts**

 

During thefourth quarter of 2002 the Company implemented several cost cutting initiativesin order to realign costs with current revenue trends.  These measures included the closing of theCompany’s Arizona office, termination of certain employees, and the reductionof miscellaneous expenditures.  TheCompany recorded restructuring expenses of $50,000 as of December 31,2002.  Certain estimates were used inestablishing an reserve.  Actual resultsmay differ from estimated amounts.

 

**Accountingfor Taxes**

 

The Company recognizes deferred tax assets and liabilities based ondifferences between the financial reporting and tax bases of assets andliabilities using the enacted tax rates and laws that are expected to be ineffect when the differences are expected to be 

 

22

----

 

reversed.The Company provides a valuation allowance for deferred tax assets for amountsit considers unrealizable.  As ofDecember 31, 2002, the Company did not provide any valuation allowance for thedeferred tax assets.  This assessment isbased on management’s best estimate of forecasted taxable income.  There can be no guarantee that the actualresults will not be materially different from forecasted results.

 

**Contingencies**

 

In the normal course of business, the Company is subject to certainclaims and legal proceedings.  We recordan accrued liability for these matters when an adverse outcome is probable andthe amount of the potential liability is reasonably estimable.  We do not believe that the resolution ofthese matters will have a material effect upon our financial condition, resultsof operations or cash flows for an interim or annual period.

 

**ITEM 7A. Quantitative and Qualitative Disclosures of Market Risk**

 

We believe ourmarket risk exposure with regard to our financial instruments is limited tochanges in interest rates. Based upon the composition of our variable-rate debtoutstanding at December 31, 2001, which is primarily borrowings under theworking capital line of credit and promissory notes, we do not believe that ahypothetical increase in the bank’s prime rate of interest or the 30-day LIBORwould be material to net income.

 

The Company’sactivities expose it to market risks that are related to the effects of changesin interest rates.  The Companymaintains an interest rate risk management strategy that uses a derivativeinstrument to minimize significant, unanticipated earnings fluctuations thatmay arise from volatility in interest rates.

 

However, byusing a derivative financial instrument to hedge exposures to changes ininterest rates, the Company exposes itself to credit risk.  The Company minimizes its credit (orrepayment) risk in derivative instruments by 1) entering into transactions witha high-quality counter-party and 2) monitoring the financial condition of itscounter-party.

 

**ITEM8.  Financial Statements andSupplementary Data**

 

Theinformation required by Item 8 is included in Item 14 of this Form 10-K.

 

**ITEM 9. ****Changes in and Disagreements With Accountants onAccounting and Financial Disclosure**

 

There havebeen no changes in or disagreements with the Company’s independent auditors.

 

**PART III**

 

**ITEM 10. Directors and Executive Officers of theCompany.**

 

The information required bythis Item will be included in the Company’s Proxy Statement for the 2003 AnnualMeeting of Shareholders under the caption Directors and Executive Officerswhich will be filed with the Securities and Exchange Commission no later than120 days after the close of the fiscal year ended December 31, 2002, and isincorporated herein by reference.

 

**ITEM 11. Executive Compensation.**

 

The information required bythis Item will be included in the Company’s Proxy Statement for the 2003 AnnualMeeting of Shareholders under the caption Executive Compensation which will befiled with the Securities and Exchange Commission no later than 120 days afterthe close of the fiscal year ended December 31, 2002, and is incorporatedherein by reference.

 

**ITEM 12. Security Ownership of Certain BeneficialOwners and Management.**

 

Information requiredpursuant to Items 403 and 201(d) of Regulation S-K is included under thecaptions “Security Ownership of Certain Beneficial Owners and Management” and“Equity Compensation Plan Information”, respectively, of the Company’sdefinitive proxy statement for the Annual Meeting of Shareholders to be held onApril 30, 2003, a copy of which has been filed within 120 days followingthe close of the fiscal year, and such information is incorporated herein byreference.

 

**ITEM 13. Certain Relationships and RelatedTransactions.**

 

Theinformation required by this Item will be included in the Company’s ProxyStatement for the 2003 Annual Meeting of Shareholders under the caption CertainRelationships and Related Transactions which will be filed with the Securitiesand Exchange Commission no later than 120 days after the close of the fiscalyear ended December 31, 2002, and is incorporated herein by reference.

 

23

----

 

**ITEM 14. Controls and Procedures.**

 

Within 90 daysprior to the filing date of this report, we evaluated the effectiveness of thedesign and operation of our disclosure controls and procedures, which aredesigned to insure the timeliness and accuracy of our disclosures and financialstatements.  This evaluation was underthe supervision and with the participation of management, including our chiefexecutive officer and chief financial officer. The Company and management also recognized that all disclosure controlsand procedures have certain limitations based on cost-benefit considerations,and can only provide reasonable assurances of achieving the desired controlobjectives.  Based upon the evaluation,our chief executive officer and chief financial officer concluded that ourdisclosure controls and procedures are effective in providing reasonableassurances that they are timely alerted to material information required to beincluded in our period Securities and Exchange Commission filings.

 

There havebeen no significant changes in the Company’s internal controls or in otherfactors that could significantly affect these controls subsequent to the dateof their evaluation.

 

**PART IV**

 

**ITEM 15. Exhibits, Financial Statement Schedules andReports on Form 8-K**

 

(a)(1)                    Financial Statements

 

The following financialstatements required by this item are submitted in a separate section beginningon page F-1 of this Report.

 
| Report of Independent  Auditors                                                                                                                         |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                    |
| Financial Statements:                                                                                                                                   |
|                                                                                                                                                    |
| Balance Sheets as of  December 31, 2002 and 2001                                                                                                        |
|                                                                                                                                                    |
| Statements  of Operations for the Years Ended December 31, 2002, 2001 and 2000                                                                          |
|                                                                                                                                                    |
| Statements  of Changes in Stockholders’ Equity for the Years Ended December 31, 2002,  2001 and 2000                                               |
|                                                                                                                                                    |
| Statements  of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000                                                                          |
|                                                                                                                                                    |
| Notes to Financial  Statements                                                                                                                          |
|                                                                                                                                                    |
| (a)(2)                    Financial  Statement Schedules |
|                                                                                                                                                    |
| Schedule  II – Valuation and Qualifying Accounts                                                                                                   |

 

(a)(3)                    Exhibits

 

The Exhibit Index isincorporated herein by reference.

 

(b)                                 Reports on Form 8-K

 

There were no reports onForm 8-K filed by the Registrant during the fourth quarter of the fiscal yearended December 31, 2002.

 

(c)                                  Exhibits

 

The exhibitsrequired by this item are listed in the Exhibit Index.

 

(d)                                 Financial Statement Schedules

 

See Item 15(a)(2).

 

24

----

 

**SIGNATURES**

 

In accordance with Section13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrantcaused this Annual Report on Form 10-K to be signed on its behalf by theundersigned thereunto duly authorized on this21st day of March 2003.

 
|   | **ON-SITE SOURCING, INC.**  |
|--------|----------------------------------|
|   |                             |
|   | By:                              | /s/ Christopher J. Weiler |   |
|   |                             | Christopher J. Weiler |
|   |                             | President, Chief Executive Officer and  Director |

 

Each personwhose signature appears below constitutes and appoints Christopher J. Weilerand Jason Parikh as his or her true and lawful attorneys-in-fact each actingalone, with full power of substitution and resubstitution, for him or her andin his or her name, place and stead, in any and all capacities to sign any or allamendments to this Annual Report on Form 10-K, and to file the same, with allexhibits thereto, and other documents in connection therewith, with theSecurities and Exchange Commission, granting unto said attorneys-in-fact fullpower and authority to do and perform each and every act and thing requisiteand necessary to be done in and about the premises, as fully for all intentsand purposes as he or she might or could do in person, hereby ratifying andconfirming all that said attorneys-in-fact, or their substitutes, each actingalone, may lawfully do or cause to be done by virtue hereof.

 

In accordance with theSecurities Exchange Act of 1934, as amended, this Annual Report on Form 10-Khas been signed below by the following persons on behalf of the Registrant, andin the capacities and on the date indicated.

 
| Date: March  21, 2003 | By:    | /s/ Christopher J. Weiler                                                            |   |
|-----------------------|--------|--------------------------------------------------------------------------------------|--------|
|                  |   | Christopher J. Weiler                                                                |
|                  |   | President,  Chief Executive Officer and Director  (Principal Executive Officer)      |
|                  |   |                                                                                 |
| Date: March  21, 2003 | By:    | /s/ Jason Parikh                                                                     |   |
|                  |   | Jason Parikh                                                                         |
|                  |   | Chief  Financial Officer and Secretary  (Principal Financial and Accounting Officer) |
|                  |   |                                                                                 |
| Date: March  21, 2003 | By:    | /s/ Clifford Kendall                                                                 |   |
|                  |   | Clifford Kendall                                                                     |
|                  |   | Director and  Chairman of the Board                                                  |
|                  |   |                                                                                 |
| Date: March  21, 2003 | By:    | /s/ Michael D. Brant                                                                 |   |
|                  |   | Michael D. Brant                                                                     |
|                  |   | Director                                                                             |
|                  |   |                                                                                 |
| Date: March  21, 2003 | By:    | /s/ Jorge R. Forgues                                                                 |   |
|                  |   | Jorge R. Forgues                                                                     |
|                  |   | Director                                                                             |
|                  |   |                                                                                 |
| Date: March  21, 2003 | By:    | /s/ Michael Meyer                                                                    |   |
|                  |   | Michael Meyer                                                                        |
|                  |   | Director                                                                             |
|                  |   |                                                                                 |
| Date: March  21, 2003 | By:    | /s/ Robert W. Pivik                                                                  |   |
|                  |   | Robert W. Pivik                                                                      |
|                  |   | Director                                                                             |
|                  |   |                                                                                 |
| Date: March  21, 2003 | By:    | /s/ Denis Seynhaeve                                                                  |   |
|                  |   | Denis Seynhaeve                                                                      |
|                  |   | Director                                                                             |

 

25

----

 

**CERTIFICATIONS**

 

I, Christopher Weiler, certifythat:

 

1. I have reviewed this Annualreport on Form 10-K of On-Site Sourcing, Inc.;

 

2. Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3. Based on my knowledge, thefinancial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4. The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a) designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b) evaluated the effectivenessof the registrant’s disclosure controls and procedures as of a date within 90days prior to the filing date of this quarterly report (the “Evaluation Date”);and

 

c) presented in this quarterlyreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a) all significant deficienciesin the design or operation of internal controls which could adversely affectthe registrant’s ability to record, process, summarize and report financialdata and have identified for the registrant’s auditors any material weaknessesin internal controls; and

 

b) any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6. The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| /s/ Christopher Weiler                                      |   |
|-------------------------------------------------------------|--------|
|                                                        |   |
|                                                        |   |
| Christopher Weiler  Chief Executive Officer  March 21, 2003 |   |

 

26

----

 

##### **CERTIFICATIONS**

 

I, Jason Parikh, certify that:

 

1. I have reviewed this Annualreport on Form 10-K of On-Site Sourcing, Inc.;

 

2. Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3. Based on my knowledge, thefinancial statements, and other financial information included in this quarterlyreport, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, theperiods presented in this quarterly report;

 

4. The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a) designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b) evaluated the effectivenessof the registrant’s disclosure controls and procedures as of a date within 90days prior to the filing date of this quarterly report (the “Evaluation Date”);and

 

c) presented in this quarterlyreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a) all significant deficienciesin the design or operation of internal controls which could adversely affectthe registrant’s ability to record, process, summarize and report financialdata and have identified for the registrant’s auditors any material weaknessesin internal controls; and

 

b) any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6. The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| /s/ Jason Parikh                                      |   |
|-------------------------------------------------------|--------|
|                                                  |   |
| Jason Parikh  Chief Financial Officer  March 21, 2003 |   |

 

27

----

 

EXHIBITINDEX

 
| **EXHIBIT  NUMBER** |   | **DESCRIPTION OF DOCUMENT**                                                                                                                                                           |
|---------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                  |
| 3.01(1)             |   | Certificate  of Incorporation of On-Site Sourcing, Inc.                                                                                                                               |
|                |   |                                                                                                                                                                                  |
| 3.02(1)             |   | Restated  By-Laws of On-Site Sourcing, Inc.                                                                                                                                           |
|                |   |                                                                                                                                                                                  |
| 4.01(1)             |   | Form of  Common Stock Certificate                                                                                                                                                     |
|                |   |                                                                                                                                                                                  |
| 4.02(1)             |   | On-Site  Sourcing’s Certificate of Incorporation is incorporated by reference to  Exhibit 3.01.                                                                                  |
|                |   |                                                                                                                                                                                  |
| 4.03(1)             |   | On-Site  Sourcing’s Restated Bylaws are incorporated by reference to Exhibit 3.02.                                                                                               |
|                |   |                                                                                                                                                                                  |
| 10.01(1)            |   | Employment  Agreement with Christopher Weiler dated January 8, 1998                                                                                                                   |
|                |   |                                                                                                                                                                                  |
| 10.02(2)            |   | Lease  agreement dated July 17, 1996, with 443 Company/William Real Estate Co., Inc.  for New York, New York office                                                                   |
|                |   |                                                                                                                                                                                  |
| 10.03(3)            |   | Lease  agreement dated March 4, 1998, with Miller Properties for storage in  Baltimore, Maryland                                                                                      |
|                |   |                                                                                                                                                                                  |
| 10.04(4)            |   | Modification  to lease agreement dated June 8, 1998, with Williams Real Estate for New  York, New York office.                                                                        |
|                |   |                                                                                                                                                                                  |
| 10.05(4)            |   | 1998 Stock  Option Plan                                                                                                                                                               |
|                |   |                                                                                                                                                                                  |
| 10.06(4)            |   | Employment  Agreement with Arne Christensen dated July 1, 1998                                                                                                                        |
|                |   |                                                                                                                                                                                  |
| 10.07(5)            |   | Purchase  Agreement for Alexandria, Virginia property dated November 15, 2000                                                                                                         |
|                |   |                                                                                                                                                                                  |
| 10.08(5)            |   | Mortgage  agreement with First Union for Alexandria, Virginia property dated November  15, 2000                                                                                       |
|                |   |                                                                                                                                                                                  |
| 10.09(5)            |   | Lease  agreement dated April 27, 2000, with Laytonsville Partnership for  Gaithersburg, Maryland office                                                                               |
|                |   |                                                                                                                                                                                  |
| 10.10(5)            |   | Lease  agreement dated September 25, 2000, with L.A. Avenue of the Arts for  Philadelphia, Pennsylvania office                                                                        |
|                |   |                                                                                                                                                                                  |
| 10.11(5)            |   | Lease  agreement dated March 1, 2000, with Chattahouchee Warehouses LLC for Atlanta,  Georgia office                                                                                  |
|                |   |                                                                                                                                                                                  |
| 10.12(5)            |   | Lease  agreement dated April 1, 2000, with GA-Met for Atlanta, Georgia office                                                                                                         |
|                |   |                                                                                                                                                                                  |
| 10.13(6)            |   | 2001 Broad  Based Option Plan                                                                                                                                                         |
|                |   |                                                                                                                                                                                  |
| 10.14(7)            |   | Lease  Agreement dated August 31, 2001, with AU Park Lane LLC for Tempe, Arizona  office                                                                                              |
|                |   |                                                                                                                                                                                  |
| 10.15(7)            |   | Lease  Agreement dated January 16, 2002, with 40 Exchange Place Corp. for New York,  New York office                                                                                  |
|                |   |                                                                                                                                                                                  |
| 10.16(7)            |   | Employment  agreement with Brian Leydet, Sr. dated September 25, 2001                                                                                                                 |
|                |   |                                                                                                                                                                                  |
| 10.17(7)            |   | Amended and  Restated Revolving Line of Credit Loan Agreement, Term Loans Agreement and  Security Agreement dated May 30, 2001, with First Union National Bank                        |
|                |   |                                                                                                                                                                                  |
| 10.18(7)            |   | First  Modification of Amended and Restated Revolving Line of Credit Loan Agreement,  Term Loans Agreement and Security Agreement dated July 2, 2001, with First  Union National Bank |
|                |   |                                                                                                                                                                                  |
| 10.19(8)            |   | Second  Modification of Amended and Restated Revolving Line of Credit, Loans  Agreement, Term Loans Agreement and Security Agreement.  Dated May 23, 2002 with Wachovia Bank     |

 

28

----

 
| 10.20(8) |   | First  Modification of Amended and Restated Revolving Note dated May 23, 2002 with  Wachovia Bank.                                                                               |
|----------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                                             |
| 10.21(9) |   | Third  Modification of Amended and Restated Revolving Line of Credit Loan Agreement,  Term Loans Agreement and Security Agreement. Dated September 25, 2002 with  Wachovia Bank. |
|     |   |                                                                                                                                                                             |
| 10.22(9) |   | $1,250,000  Term Note Agreement Dated September 25, 2002 with Wachovia Bank.                                                                                                     |
|     |   |                                                                                                                                                                             |
| 10.23*   |   | Fourth  Modification of Amended and Restated Revolving Line of Credit Loan Agreement,  Term Loans Agreement and Security Agreement. Dated February 3, 2003 with  Wachovia Bank.  |
|     |   |                                                                                                                                                                             |
| 10.24*   |   | Fifth  Modification of Amended and Restated Revolving Line of Credit Loan Agreement,  Term Loans Agreement and Security Agreement. Dated March 24, 2003 with  Wachovia Bank.     |
|     |   |                                                                                                                                                                             |
| 10.25*   |   | Second  Modification of Amended and Restated Revolving Note dated March 24, 2003 with  Wachovia Bank.                                                                            |
|     |   |                                                                                                                                                                             |
| 23.1*    |   | Consent of  PricewaterhouseCoopers, LLP.                                                                                                                                         |
|     |   |                                                                                                                                                                             |
| 23.2*    |   | Consent of  Reznick Fedder & Silverman P.C.                                                                                                                                  |
|     |   |                                                                                                                                                                             |
| 99.1*    |   | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                         |
|     |   |                                                                                                                                                                             |
| 99.2*    |   | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                         |

 

----

(1)                                  Incorporatedby reference to the Company’s Registration Statement on Form SB-2, file No.333-3544.

 

(2)                                  Incorporatedby reference to the Company’s Annual Report on Form 10-KSB for the year endedDecember 31, 1996

 

(3)                                  Incorporatedby reference to the Company’s Annual Report on Form 10-KSB for the year endedDecember 31, 1997

 

(4)                                  Incorporatedby reference to the Company’s Annual Report on Form 10-KSB for the year endedDecember 31, 1998

 

(5)                                  Incorporatedby reference to the Company’s Annual Report on Form 10-K for the year ended December31, 2000

 

(6)                                  Incorporatedby reference to the Company’s Quarterly Report on Form 10-Q for the periodended June 30, 2001

 

(7)                                  Incorporatedby reference to the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2001

 

(8)                                  Incorporatedby reference to the Company’s Quarterly Report on Form 10-Q for the periodended June 30, 2002

 

(9)                                  Incorporatedby reference to the Company’s Quarterly Report on Form 10-Q for the periodended September 30, 2002

 

* Filed herewith.  All other exhibits have been previouslyfiled as indicated.

 

29

----

 

REPORT OFINDEPENDENT ACCOUNTANTS

 

 

To the Board of Directors andStockholders of On-Site Sourcing, Inc.:

** **

In our opinion, theaccompanying balance sheet as of December 31, 2002 and the related statementsof operations, changes in stockholders’ equity and cash flows present fairly,in all material respects, the financial position of On-Site Sourcing, Inc. atDecember 31, 2002, and the results of its operations and its cash flows for theyear then ended in conformity with accounting principles generally accepted inthe United States of America.  Inaddition, in our opinion, the financial statement schedule appearing under Item15(a)(2) on Page F-23 present fairly, in all material respects, the informationset forth therein when read in conjunction with the related financialstatements. These financial statements and financial statement schedule are theresponsibility of the Company’s management; our responsibility is to express anopinion on these financial statements and financial statement schedule based onour audit.  We conducted our audit ofthese statements in accordance with auditing standards generally accepted inthe United States of America, which require that we plan and perform the auditto obtain reasonable assurance about whether the financial statements are freeof material misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation.  Webelieve that our audit provides a reasonable basis for our opinion.  The financial statements of the Company asof December 31, 2001 and for the two years ended December 31, 2001 and 2000were audited by other independent accountants whose report dated January 31,2002 expressed an unqualified opinion on those statements.

 

 
| /s/  PricewaterhouseCoopers |   |
|-----------------------------|--------|
|                        |
| McLean, VA                  |

March 5, 2003, except for thefirst paragraph of Note 7, as to which the date is March 25, 2003.

 

F-1

----

 

INDEPENDENT AUDITORS’ REPORT

 

 

To the Board of Directors

On-Site Sourcing, Inc.

 

We haveaudited the accompanying balance sheet of On-Site Sourcing, Inc., as ofDecember 31, 2001, and the related statements of income, stockholders’ equityand cash flows for the years ended December 31, 2001 and 2000.  These financial statements are the responsibilityof the company’s management.  Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conductedour audits in accordance with auditing standards generally accepted in theUnited States of America.  Thosestandards require that we plan and perform the audits to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of On-Site Sourcing, Inc., as ofDecember 31, 2001, and the results of its operations and its cash flows for theyears ended December 31, 2001 and 2000, in conformity with accountingprinciples generally accepted in the United States of America.

 

 
| /s/ Reznick  Fedder & Silverman |   |
|-------------------------------------|--------|
|                                |
| Bethesda,  Maryland                 |
| January 31,  2002                   |

 

F-2

----

 

On-Site Sourcing, Inc.

BALANCE SHEETS

As of December 31, 

 
|                                                                                                                                                             |   | **2002**   |       | **2001**   |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|------------|--------|
| ASSETS                                                                                                                                                           |   |       |       |       |   |
| CURRENT                                                                                                                                                          |   |       |       |       |   |
| Cash                                                                                                                                                             |   | $          | 4,279      |       | $      | 3,282 |   |
| Accounts receivable, net of allowance of  $264,096 and $349,278                                                                                                  |   | 8,157,822  |       | 8,103,379  |   |
| Prepaid supplies                                                                                                                                                 |   | 503,693    |       | 611,988    |   |
| Prepaid expenses                                                                                                                                                 |   | 288,469    |       | 242,818    |   |
| Deferred tax asset                                                                                                                                               |   | 104,608    |       | —     |   |
| Notes receivable                                                                                                                                                 |   | 48,442     |       | 151,580    |   |
| Total current assets                                                                                                                                             |   | 9,107,313  |       | 9,113,047  |   |
|                                                                                                                                                             |   |       |       |       |   |
| PROPERTY AND EQUIPMENT, net                                                                                                                                      |   | 14,894,103 |       | 14,933,769 |   |
|                                                                                                                                                             |   |       |       |       |   |
| OTHER ASSETS                                                                                                                                                     |   |       |       |       |   |
| Goodwill                                                                                                                                                         |   | 648,443    |       | 906,550    |   |
| Income tax refundable                                                                                                                                            |   | 606,134    |       | 38,303     |   |
| Other assets                                                                                                                                                     |   | 152,767    |       | 167,259    |   |
| Total assets                                                                                                                                                     |   | $          | 25,408,760 |       | $      | 25,158,928 |   |
|                                                                                                                                                             |   |       |       |       |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                                       |   |       |       |       |   |
| CURRENT LIABILITIES                                                                                                                                              |   |       |       |       |   |
| Line of credit                                                                                                                                                   |   | $          | 2,861,414  |       | $      | 3,120,166 |   |
| Current portion of long-term debt                                                                                                                                |   | 1,101,706  |       | 1,314,396  |   |
| Accounts payable                                                                                                                                                 |   | 1,987,302  |       | 2,759,191  |   |
| Accrued and other liabilities                                                                                                                                    |   | 1,238,028  |       | 738,972    |   |
| Deferred income taxes                                                                                                                                            |   | —     |       | 58,735     |   |
| Total current liabilities                                                                                                                                        |   | 7,188,450  |       | 7,991,460  |   |
|                                                                                                                                                             |   |       |       |       |   |
| NONCURRENT LIABILITIES                                                                                                                                           |   |       |       |       |   |
| Long-term debt, net of current portion                                                                                                                           |   | 6,897,100  |       | 7,030,794  |   |
| Deferred rent                                                                                                                                                    |   | 257,747    |       | 217,143    |   |
| Deferred tax liability                                                                                                                                           |   | 266,846    |       | 374,216    |   |
| Interest rate swap contract liability                                                                                                                            |   | 913,306    |       | —     |   |
| Total liabilities                                                                                                                                                |   | 15,523,449 |       | 15,613,613 |   |
|                                                                                                                                                             |   |       |       |       |   |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                    |   |       |       |       |   |
|                                                                                                                                                             |   |       |       |       |   |
| STOCKHOLDERS’ EQUITY                                                                                                                                        |   |       |       |       |   |
| Common stock, $.01 par value, 20,000,000  shares authorized; 5,589,240 and 5,254,259 shares issued and 5,475,650 and  5,140,669 shares outstanding, respectively |   | 55,892     |       | 52,543     |   |
| Additional paid-in capital                                                                                                                                       |   | 7,882,313  |       | 7,131,139  |   |
| Other comprehensive loss                                                                                                                                         |   | (551,545   | )          | —     |   |
| Treasury stock (113,590 shares of common  stock at cost)                                                                                                         |   | (396,152   | )          | (396,152   | )      |
| Retained earnings                                                                                                                                                |   | 2,894,803  |       | 2,757,785  |   |
| Total stockholders’ equity                                                                                                                                  |   | 9,885,311  |       | 9,545,315  |   |
| Total liabilities and stockholders’ equity                                                                                                                  |   | $          | 25,408,760 |       | $      | 25,158,928 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

F-3

----

 

On-Site Sourcing, Inc.

STATEMENTS OF OPERATIONS

For the Years Ended December 31,

 
|                                 |   | **2002**   |       | **2001**   |   | **2000**   |   |
|--------------------------------------|--------|------------|------------|------------|--------|------------|--------|
|                                 |   |       |       |       |   |       |   |
| Revenue                              |   | $          | 37,076,504 |       | $      | 39,460,153 |   | $ | 35,489,911 |   |
|                                 |   |       |       |       |   |       |   |
| Cost of revenue                      |   | 22,805,839 |       | 26,282,163 |   | 24,457,491 |   |
|                                 |   |       |       |       |   |       |   |
| Gross profit                         |   | 14,270,665 |       | 13,177,990 |   | 11,032,420 |   |
|                                 |   |       |       |       |   |       |   |
| Sales and marketing                  |   | 4,721,970  |       | 3,567,748  |   | 3,706,762  |   |
| Administrative                       |   | 8,263,299  |       | 6,078,501  |   | 4,606,426  |   |
| Impairment of goodwill               |   | 258,107    |       | —     |   | —     |   |
| Merger related costs                 |   | —     |       | —     |   | 330,807    |   |
|                                 |   |       |       |       |   |       |   |
|                                 |   | 13,243,376 |       | 9,646,249  |   | 8,643,995  |   |
|                                 |   |       |       |       |   |       |   |
| Income from operations               |   | 1,027,289  |       | 3,531,741  |   | 2,388,425  |   |
|                                 |   |       |       |       |   |       |   |
| Other income (expense):              |   |       |       |       |   |       |   |
|  Other income                   |   | 103,874    |       | 322,766    |   | 88,051     |   |
|  Other expense                  |   | (68,965    | )          | (413,943   | )      | (196,805   | )      |
|  Interest expense               |   | (839,650   | )          | (1,195,036 | )      | (415,236   | )      |
|                                 |   |       |       |       |   |       |   |
|                                 |   | (804,741   | )          | (1,286,213 | )      | (523,990   | )      |
|                                 |   |       |       |       |   |       |   |
| Income before income taxes           |   | 222,548    |       | 2,245,528  |   | 1,864,435  |   |
|                                 |   |       |       |       |   |       |   |
| Income tax provision                 |   | 85,530     |       | 950,468    |   | 922,022    |   |
|                                 |   |       |       |       |   |       |   |
| Net income                           |   | $          | 137,018    |       | $      | 1,295,060  |   | $ | 942,413 |   |
|                                 |   |       |       |       |   |       |   |
| Earnings per share:                  |   |       |       |       |   |       |   |
| Basic                                |   | $          | 0.03       |       | $      | 0.25       |   | $ | 0.19 |   |
| Diluted                              |   | $          | 0.02       |       | $      | 0.24       |   | $ | 0.18 |   |
|                                 |   |       |       |       |   |       |   |
| Weighted average shares outstanding: |   |       |       |       |   |       |   |
| Basic                                |   | 5,392,266  |       | 5,145,291  |   | 4,870,825  |   |
| Diluted                              |   | 5,620,172  |       | 5,291,666  |   | 5,320,943  |   |

 

The accompanying notes are an integral part of these financialstatements.

 

F-4

----

 

On-Site Sourcing, Inc.

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUTY

For the Years Ended December 31, 2002, 2001and 2000

 
|                                  |       | **Common Stock** |       | **Additional  Paid-  In capital** |   | **Subscription  Receivable** |   | **Other  Comprehensive  Loss** |   | **Treasury  Stock** |    | **Retained  Earnings** |   | **Total** |   |
|---------------------------------------|------------|------------------|------------|-----------------------------------|--------|------------------------------|--------|--------------------------------|--------|---------------------|---------|------------------------|--------|-----------|--------|
|                                  | **Shares** |             | **Amount** |                              |   |                         |   |                           |   |                |
|                                  |       |             |       |                              |   |                         |   |                           |   |                |    |                   |   |      |   |   |   |
| Balance, December 31, 1999            |       | 4,851,669        |       | $                                 | 48,517 |                         | $      | 6,469,921                      |   | $                   | (50,400 | )                      | $      | —    |   | $ | (44,331 | ) | $ | 520,312 |   | $ | 6,944,019 |   |
|                                  |       |             |       |                              |   |                         |   |                           |   |                |    |                   |   |      |   |   |   |
| Sale of common stock                  |       | 205,546          |       | 2,055                             |   | 316,323                      |   | —                         |   | —              |    | —                 |   | —    |   | 318,378 |   |
|                                  |       |             |       |                              |   |                         |   |                           |   |                |    |                   |   |      |   |   |   |
| Common stock reacquired               |       | —           |       | —                            |   | —                       |   | —                         |   | —              |    | (351,821               | )      | —    |   | (351,821 | ) |
|                                  |       |             |       |                              |   |                         |   |                           |   |                |    |                   |   |      |   |   |   |
| Net income                            |       | —           |       | —                            |   | —                       |   | —                         |   | —              |    | —                 |   | 942,413   |   | 942,413 |   |
|                                  |       |             |       |                              |   |                         |   |                           |   |                |    |                   |   |      |   |   |   |
| Balance, December 31, 2000            |       | 5,057,215        |       | 50,572                            |   | 6,786,244                    |   | (50,400                        | )      | —              |    | (396,152               | )      | 1,462,725 |   | 7,852,989 |   |
|                                  |       |             |       |                              |   |                         |   |                           |   |                |    |                   |   |      |   |   |   |
| Sale of common stock                  |       | 197,044          |       | 1,971                             |   | 344,895                      |   | —                         |   | —              |    | —                 |   | —    |   | 346,866 |   |
|                                  |       |             |       |                              |   |                         |   |                           |   |                |    |                   |   |      |   |   |   |
| Collection of subscription receivable |       | —           |       | —                            |   | —                       |   | 50,400                         |   | —              |    | —                 |   | —    |   | 50,400 |   |
|                                  |       |             |       |                              |   |                         |   |                           |   |                |    |                   |   |      |   |   |   |
| Net income                            |       | —           |       | —                            |   | —                       |   | —                         |   | —              |    | —                 |   | 1,295,060 |   | 1,295,060 |   |
|                                  |       |             |       |                              |   |                         |   |                           |   |                |    |                   |   |      |   |   |   |
| Balance, December 31, 2001            |       | 5,254,259        |       | 52,543                            |   | 7,131,139                    |   | —                         |   | —              |    | (396,152               | )      | 2,757,785 |   | 9,545,315 |   |
|                                  |       |             |       |                              |   |                         |   |                           |   |                |    |                   |   |      |   |   |   |
| Sale of common stock                  |       | 334,981          |       | 3,349                             |   | 751,174                      |   | —                         |   | —              |    | —                 |   | —    |   | 754,523 |   |
|                                  |       |             |       |                              |   |                         |   |                           |   |                |    |                   |   |      |   |   |   |
| Other comprehensive loss              |       | —           |       | —                            |   | —                       |   | —                         |   | (551,545            | )       | —                 |   | —    |   | (551,545 | ) |
|                                  |       |             |       |                              |   |                         |   |                           |   |                |    |                   |   |      |   |   |   |
| Net income                            |       | —           |       | —                            |   | —                       |   | —                         |   | —              |    | —                 |   | 137,018   |   | 137,018 |   |
|                                  |       |             |       |                              |   |                         |   |                           |   |                |    |                   |   |      |   |   |   |
| Balance, December 31, 2002            |       | 5,589,240        |       | $                                 | 55,892 |                         | $      | 7,882,313                      |   | $                   | —  |                   | $      | (551,545  | )      | $ | (396,152 | ) | $ | 2,894,803 |   | $ | 9,885,311 |   |

 

The accompanying notes are an integral partof these financial statements

 

F-5

----

 

On-Site Sourcing, Inc.

STATEMENTS OF CASH FLOWS

For the Years Ended December 31,

 
|                                                                               |   | **2002**    |    | **2001**    |   | **2000**    |   |
|------------------------------------------------------------------------------------|--------|-------------|---------|-------------|--------|-------------|--------|
| Cash flows from operating activities:                                              |   |        |    |        |   |        |   |
| Net income                                                                         |   | $           | 137,018 |        | $      | 1,295,060   |   | $ | 942,413 |   |
| Adjustments to reconcile net income to net  cash provided by (used in) operations: |   |        |    |        |   |        |   |
| Depreciation                                                                       |   | 2,433,637   |    | 2,204,559   |   | 1,571,818   |   |
| Loss from disposal of assets                                                       |   | 96,030      |    | 95,719      |   | 86,185      |   |
| Provisions for (Recovery of) bad debt                                              |   | 49,615      |    | (90,000     | )      | 194,286     |   |
| Impairment of goodwill                                                             |   | 258,107     |    | —      |   | —      |   |
| Deferred income taxes                                                              |   | 91,048      |    | (291,610    | )      | 338,379     |   |
| Changes in assets and liabilities                                                  |   |        |    |        |   |        |   |
| Accounts receivable                                                                |   | (104,058    | )       | 1,748,712   |   | (3,493,755  | )      |
| Prepaid supplies                                                                   |   | 108,295     |    | 65,783      |   | (175,410    | )      |
| Prepaid expenses                                                                   |   | (45,651     | )       | 228,946     |   | (309,280    | )      |
| Income tax refundable                                                              |   | (567,831    | )       | 677,371     |   | (715,674    | )      |
| Other assets                                                                       |   | 14,492      |    | (3,835      | )      | (80,492     | )      |
| Accounts payable and accrued liabilities                                           |   | (272,833    | )       | (505,749    | )      | 1,388,421   |   |
| Deferred rent                                                                      |   | 40,604      |    | 27,966      |   | 55,609      |   |
| Net cash provided by (used in) operations                                          |   | 2,238,473   |    | 5,452,922   |   | (197,500    | )      |
|                                                                               |   |        |    |        |   |        |   |
| Cash flows from investing activities:                                              |   |        |    |        |   |        |   |
| Acquisition of property and equipment                                              |   | (2,533,023  | )       | (2,119,625  | )      | (4,535,672  | )      |
| Proceeds from disposal of equipment                                                |   | 43,022      |    | 15,000      |   | 25,414      |   |
| Receipt of payments on notes receivable                                            |   | 103,138     |    | 97,528      |   | 62,833      |   |
|                                                                               |   |        |    |        |   |        |   |
| Net cash used in investing activities                                              |   | (2,386,863  | )       | (2,007,097  | )      | (4,447,425  | )      |
|                                                                               |   |        |    |        |   |        |   |
| Cash flows from financing activities:                                              |   |        |    |        |   |        |   |
| Proceeds from sale of common stock                                                 |   | 754,523     |    | 346,865     |   | 318,378     |   |
| Proceeds from subscription receivable                                              |   | —      |    | 50,400      |   | —      |   |
| Payments of long-term debt                                                         |   | (1,596,384  | )       | (1,153,804  | )      | (681,009    | )      |
| Long term debt borrowing                                                           |   | 1,250,000   |    | —      |   | —      |   |
| Borrowings under line of credit                                                    |   | 19,260,035  |    | 18,835,106  |   | 23,136,284  |   |
| Payments on line of credit                                                         |   | (19,518,787 | )       | (21,524,538 | )      | (17,796,161 | )      |
| Payments for reacquisition of common stock                                         |   | —      |    | —      |   | (351,821    | )      |
|                                                                               |   |        |    |        |   |        |   |
| Net cash provided by (used in) financing  activities                               |   | 149,387     |    | (3,445,971  | )      | 4,625,671   |   |
|                                                                               |   |        |    |        |   |        |   |
| NET CHANGE IN CASH                                                                 |   | 997         |    | (146        | )      | (19,254     | )      |
|                                                                               |   |        |    |        |   |        |   |
| Cash, beginning of year                                                            |   | 3,282       |    | 3,428       |   | 22,682      |   |
|                                                                               |   |        |    |        |   |        |   |
| Cash, end of year                                                                  |   | $           | 4,279   |        | $      | 3,282       |   | $ | 3,428 |   |
|                                                                               |   |        |    |        |   |        |   |
| Supplemental disclosure of cash  flow information:                                 |   |        |    |        |   |        |   |
|                                                                               |   |        |    |        |   |        |   |
| Interest paid                                                                      |   | $           | 843,643 |        | $      | 1,107,835   |   | $ | 371,205 |   |
| Income taxes paid                                                                  |   | $           | 454,392 |        | $      | 539,210     |   | $ | 1,298,845 |   |
|                                                                               |   |        |    |        |   |        |   |
| Non-cash investing and financing  activities:                                      |   |        |    |        |   |        |   |
|                                                                               |   |        |    |        |   |        |   |
| Equipment financed through long-term debt                                          |   | $           | —  |        | $      | —      |   | $ | 2,802,943 |   |
| Acquisition of assets financed through  long-term debt                             |   | $           | —  |        | $      | —      |   | $ | 6,276,666 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

F-6

----

 

On-Site Sourcing, Inc.

Notes toFinancial Statements

December 31, 2002, 2001, 2000

 

1.               OPERATIONS

 

On-SiteSourcing, Inc. (the Company) was incorporated in the Commonwealth of Virginiain December 1992 and changed its state of incorporation to Delaware in January1996.  The Company provides digitalimaging, reprographics, and color and digital printing to law firms and otherorganizations throughout the United States. Services are primarily performed inthe metropolitan areas of Philadelphia, Pennsylvania, Washington, D.C.,Atlanta, Georgia, New York, New York, Gaithersburg, Maryland, and Tempe,Arizona (through October 15, 2002).  InAugust 2002, the Company expanded its operations to Chicago, Illinois andWilmington, Delaware. 

 

Effective October15, 2002, the Company ceased production at its facility in Tempe, Arizona, asresult of a strategic decision to focus on larger geographic markets forgrowth, and to minimize current losses. The production facility represented acomponent of the imaging services segment.

 

2.               SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

Thepreparation of the financial statements, in conformity with accountingprinciples generally accepted in the United States of America, requiresestimates and assumptions that affect the reported amounts of assets andliabilities, revenue and expenses, and related disclosures of contingent assetsand liabilities in the financial statements and accompanying notes.  On an on-going basis, the Company evaluatesits estimates, including, but not limited to, those related to bad debts,goodwill, income taxes, restructuring and impairment charges, andcontingencies. The Company bases its estimates on historical experience and onvarious other assumptions that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying value of assets and liabilities that are not readily apparent fromother sources. Actual results could differ from those estimates under differentassumptions or conditions.

 

Revenue Recognition

 

Revenue isprimarily derived from providing imaging, reprographics, and digital printingservices, and prior to first quarter of 2002, facility managementservices.  The Company recognizesrevenue from services rendered when the following four revenue recognitioncriteria are met: persuasive evidence of an arrangement exists, services havebeen rendered or delivery has occurred, the selling price is fixed ordeterminable, and collectibility is reasonably assured.  Return and bad debt allowances are estimatedbased on specific identification and historical information. 

 

Reprographicservices involve the copying and management of large amounts of documentsextracted in their original format from the offices and files ofcustomers.  A typical job ranges in sizefrom single documents with a small number of pages to multiple sets ofdocuments, which can exceed a million pages. Reprographic services are generally invoiced upon delivery, on ajob-by-job basis, and based on the number of copies and the level of difficultyin copying the original documents.  

 

Imagingservices are provided primarily to law firms, which often need to search andretrieve documents in a timely and efficient manner.  Imaging services involves the conversion or transfer oftraditional paper and 

 

F-7

----

 

electronicdocuments into electronic media or vice-versa, and include scanning ofdocuments, converting email, attachments and other electronic files to images,indexing/coding, optical character recognition, electronic document search andretrieval services, and blowback printing. Imaging services are typically invoiced on a job-by-job basis, based onthe number of images and complexity of the retrieval applications, and upondelivery of electronic media such as CD-ROM. 

 

DigitalPrinting services include both black and white and color digital production ofcatalogs, brochures, postcards, stationary, direct mail, newsletters, andexhibit materials, and are provided to all organizations requiring printmedia.  Printing jobs are typicallyinvoiced on a job-by-job basis depending on several factors, includingquantity, number of colors, quality of paper, and graphic design time.  

 

For the yearsended December 31, 2001 and 2000, the Company also derived significant revenuefrom facility management services. Facilities management services include on-premise management ofcustomer’s support services, including mailroom operations, facsimile transmission,records and supply room management and copying services.  Revenue on facility management services arerecognized on a monthly basis over the contract term (typically one year) asservices are performed.  Revenuegenerated from facilities management services was not material during 2002. 

 

Concentration of Credit Risk

 

Financialinstruments that potentially subject the Company to concentrations of creditrisk consist primarily of  accountsreceivable. The Company provides services primarily to law firms throughout theUnited States in the ordinary course of business. The Company routinelyassesses the financial strength of its customers and maintains allowances foranticipated losses. For the years ended December 31, 2002 and 2001, noindividual customer accounted for 10% or more of revenue or accountsreceivable. 

 

Prepaid Supplies

 

The Companymaintains on premise a planned level of supplies, primarily printing andcopying materials, for use in production activities.  Such amounts are capitalized upon receipt and expensed to costsof revenue as they are consumed in production. 

 

Property and Equipment

 

Property andequipment are stated at cost, net of accumulated depreciation.  Depreciation is computed using thestraight-line method over the estimated useful lives of the assets, as follows:three years for computer equipment and software and five to seven years forfurniture and equipment.  Leaseholdimprovements are amortized using the straight-line method over the estimateduseful lives of the improvements or the term of the lease, whichever isshorter. 

 

Expendituresfor maintenance and repairs are charged to expense as incurred. Expendituresfor major renewals and betterments that extend the useful lives of property andequipment are capitalized and depreciated over the remaining useful lives ofthe asset. When assets are retired or sold, the cost and related accumulateddepreciation are removed from the accounts and any resulting gain or loss isrecognized in the results of operations.

 

Goodwill

 

EffectiveJanuary 1, 2002, the Company adopted the provisions of Statement of FinancialAccounting Standards (“SFAS”) No. 141, “Business Combinations,” (SFAS No.141) and SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS No.142).  SFAS No. 141 requiresbusiness combinations initiated after June 30, 2001 to be accounted forusing the purchase method of accounting, and broadens the criteria forrecording intangible 

 

F-8

----

 

assets apartfrom goodwill. SFAS No. 142 requires that purchased goodwill and certainindefinite-lived intangibles no longer be amortized, but instead be tested forimpairment at least annually.  SFASNo. 142 prescribes a two-phase process for impairment testing of goodwill.The first phase screens for impairment; while the second phase (if necessary)measures the impairment. The Company completed its first phase impairmentanalysis upon adopting SFAS No. 142 during the first quarter of 2002 and foundno instances of impairment of its recorded goodwill; accordingly, the Companydid not perform the second phase analysis. The Company noted subsequent indicators of impairment of goodwill duringthe third quarter of 2002 and as a result, has written off approximately$258,000 of recorded goodwill (Note 5).

 

In accordancewith Accounting Principles Board (“APB”) Opinion No. 20, “AccountingChanges,” the effect of these accounting changes is reflected prospectively.Supplemental comparative disclosure, as if the change had been retroactively applied,is as follows: 

 
|                                |   | **For the  Years Ended December 31,** |    |
|-------------------------------------|--------|---------------------------------------|---------|
|                                |   | **2002**                              |    | **2001** |   | **2000** |   |
| Net income                          |   |                                  |    |   |   |   |   |
| Reported net income                 |   | $                                     | 137,018 |   | $ | 1,295,060 |   | $ | 942,413 |   |
| Goodwill amortization, net of tax   |   | —                                |    | 60,791 |   | 21,222 |   |
| Adjusted net income                 |   | $                                     | 137,018 |   | $ | 1,355,851 |   | $ | 963,635 |   |
|                                |   |                                  |    |   |   |   |   |
| Basic earnings per share:           |   |                                  |    |   |   |   |   |
| Reported earnings per share         |   | $                                     | 0.03    |   | $ | 0.25 |   | $ | 0.19 |   |
| Goodwill amortization, net of tax   |   | —                                |    | 0.01 |   | — |   |
| Adjusted basic earnings per share   |   | $                                     | 0.03    |   | $ | 0.26 |   | $ | 0.19 |   |
|                                |   |                                  |    |   |   |   |   |
| Diluted earnings per share:         |   |                                  |    |   |   |   |   |
| Reported earnings per share         |   | $                                     | 0.02    |   | $ | 0.24 |   | $ | 0.18 |   |
| Goodwill amortization, net of tax   |   | —                                |    | 0.01 |   | — |   |
| Adjusted diluted earnings per share |   | $                                     | 0.02    |   | $ | 0.25 |   | $ | 0.18 |   |

 

Impairment of Long-Lived Assets 

 

Long-livedassets, primarily property and equipment, are reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of theassets might not be recoverable. The Company does not perform a periodicassessment of assets for impairment in the absence of such information orindicators. Conditions that would necessitate an impairment assessment includea significant decline in the observable market value of an asset, a significantchange in the extent or manner in which an asset is used, or a significantadverse change that would indicate that the carrying amount of an asset orgroup of assets is not recoverable. For long-lived assets to be held and used,the Company recognizes an impairment loss only if its carrying amount is notrecoverable through its undiscounted cash flows and measures the impairmentloss based on the difference between the carrying amount and estimated fairvalue. 

 

Deferred Rent

 

Deferred rentis recorded and amortized to the extent the total minimum rental paymentsallocated to the current period on a straight-line basis are less than the cashpayments required.

 

F-9

----

 

Derivative Instrument and Hedging Activity

 

The Companyuses an interest rate swap to convert its variable-rate interest payments onits mortgage ($5,413,869 at December 31, 2002) to fixed-rate interest payments.This interest rate swap has been designated and qualifies as a cash-flow hedgeunder SFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities” (SFAS No. 133).

 

SFAS No.133requires the Company to carry all derivative financial instruments on thebalance sheet at fair value.  Changes infair value of designated, qualified and effective cash flow hedges areestimated and recorded as a component of Other Comprehensive Income (Loss)until the hedged transaction occurs, which at that time, is recognized inearnings (loss).  The Company hasdetermined that its interest rate swap was highly effective upon adopting SFASNo. 133.  

 

During thefirst quarter of 2002, given the continued decline in market interest rate, theCompany measured the fair value of the interest rate swap and as a result,recorded interest rate swap contract liability of $434,000, which was theestimated fair value of the interest rate swap, along with an unrealizedafter-tax loss of $265,000 in other comprehensive loss, which is a component ofstockholders’ equity.  As of December31, 2002, the Company carried a non-current interest rate swap liability of$913,306 and an unrealized after-tax loss of $551,545 in other comprehensiveloss.  The Company assumes the hedgedtransaction will occur during the term of the underlying agreement.  Results of operations may be materiallyaffected if such transaction were not to occur.

 

Cost of Revenue

 

Cost ofrevenue consists of direct production labor, depreciation of productionequipment, costs of the production facility, inbound and outbound shippingcharges, packaging supplies and other costs incurred in providing services. 

 

Stock-Based Compensation

 

The Companyuses the intrinsic-value method in accounting for its employee stock optionsrather than the alternative fair value accounting method. Companies that followthe intrinsic-value method must provide pro forma disclosure of the impact ofapplying the fair-value method.

 

The followingtable summarizes relevant information as to reported results under theCompany’s intrinsic-value method of accounting for stock awards, withsupplemental information as if the fair value recognition provisions had beenapplied:

 
|                                          |   | **For the  Years Ended December 31,** |    |
|-----------------------------------------------|--------|---------------------------------------|---------|
|                                          |   | **2002**                              |    | **2001** |   | **2000** |   |
| Net income, as reported                       |   | $                                     | 137,018 |   | $ | 1,295,060 |   | $ | 942,413 |   |
| Less: stock-based compensation                |   | (118,310                              | )       | (70,748 | ) | (234,840 | ) |
| Adjusted net income                           |   | $                                     | 18,708  |   | $ | 1,224,312 |   | $ | 707,573 |   |
|                                          |   |                                  |    |   |   |   |   |
| Basic earnings per share - as reported        |   | $                                     | 0.03    |   | $ | 0.25 |   | $ | 0.19 |   |
| Diluted earnings per share – as reported |   | $                                     | 0.02    |   | $ | 0.24 |   | $ | 0.18 |   |
| Basic earnings per share – as adjusted   |   | $                                     | —  |   | $ | 0.24 |   | $ | 0.15 |   |
| Diluted earnings per share – as adjusted |   | $                                     | —  |   | $ | 0.23 |   | $ | 0.13 |   |

 

F-10

----

 

The fair valuefor each option granted was estimated at the date of grant using theBlack-Scholes option-pricing model, assuming no expected dividends and thefollowing weighted average assumptions: 

 
|                             |   | **For the  Years Ended December 31,** |   |
|----------------------------------|--------|---------------------------------------|--------|
|                             |   | **2002**                              |   | **2001** |   | **2000** |   |
| Average risk-free interest rate  |   | 3.75                                  | %      | 5.7 | % | 5.7 | % |
| Average expected life (in years) |   | 5                                     |   | 5 |   | 5 |   |
| Volatility                       |   | 81                                    | %      | 75 | % | 75 | % |

 

 

Comprehensive Loss

 

Othercomprehensive loss recorded by the Company is comprised of unrealized loss frominterest rate swap instrument, net of related tax effects.

 

Earnings Per Share

 

Basic earningsper share is computed using the weighted average number of common sharesoutstanding during the period, and excludes any dilutive effects of options orwarrants.  Diluted earnings per share iscomputed using the weighted average number of common and common stock equivalentshares outstanding during the period; common stock equivalent shares areexcluded from the computation if their effect is antidilutive. 

 

Income Taxes

 

The Companyaccounts for income taxes utilizing the liability method of accounting.  Under the liability method, deferred taxesare determined based on differences between financial statement and tax basesof assets and liabilities at enacted tax rates in effect in years in whichdifferences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferredtax assets to amounts that are expected to be realized. 

 

Segment Reporting

 

Statement ofFinancial Accounting Standards No. 131, “Disclosure about Segments of anEnterprise and Related Information” (SFAS No. 131) establishes annual andinterim reporting standards for an enterprise’s operating segments and relateddisclosures about its products, services, geographic areas, and majorcustomers.  The Company has determinedthat it operated, until December 31, 2001, four segments, including imaging,reprographics, digital printing and facility management services.  During first quarter 2002, the Companysignificantly reduced the facility management service activities and no longermanaged such operations as a separate segment. 

 

Reclassification

 

Certain prioryear amounts in the financial statements have been reclassified to conform tothe current year presentation.

** **

**Recent Accounting Pronouncements**

 

In August2001, the FASB issued SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets” that is applicable to financial statementsissued for fiscal years beginning after December 15, 2001. The FASB’s newrules on asset impairment supersede SFAS No. 121, “Accounting for theImpairment of Long-

 

F-11

----

 

Lived Assetsand for Long-Lived Assets to Be Disposed Of” and portions of AccountingPrinciples Bulletin Opinion 30, “Reporting the Results of Operations.” ThisStandard provides a single accounting model for long-lived assets to bedisposed of and significantly changes the criteria that would have to be met toclassify an asset as held-for-sale. Classification as held-for-sale is animportant distinction since such assets are not depreciated and are stated atthe lower of fair value and carrying amount. This Standard also requiresexpected future operating losses from discontinued operations to be displayedin the period(s) in which the losses are incurred, rather than as of themeasurement date as presently required. The provisions of this Standard are notexpected to have a significant effect on the Company’s financial position,results of operations, or cash flows.

 

In August2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exitor Disposal Activities” (SFAS No. 146). It addresses financial accounting and reporting for costs associatedwith exit or disposal activities and nullified Emerging Issues Task Force(EITF) Issue No. 94-3, “Liability Recognition for Certain Employee TerminationBenefits and Other Costs to Exit an Activity (including Certain Costs Incurredin a Restructuring).” SFAS No. 146 requires that a liability for a costassociated with an exit or disposal activity be recognized when the liabilityis incurred and establishes that fair value is the objective for initialmeasurement of the liability.  UnderEITF Issue No. 94-3, a liability for an exit cost is recognized at the date ofan entity’s commitment to an exit plan. The new standard is effective for exit or disposal activities that areinitiated after December 31, 2002.  TheCompany does not believe SFAS No. 146 will have a material effect on theCompany’s financial position, results of operations, or cash flows.

 

In November2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others” (FIN 45). FIN 45 requires that upon issuance of aguarantee, a guarantor must recognize a liability for the fair value of anobligation assumed under a guarantee. FIN 45 also requires additionaldisclosures by a guarantor in its interim and annual financial statements aboutthe obligations associated with guarantees issued. The recognition provisionsof FIN 45 are effective for any guarantees issued or modified after December31, 2002. The disclosure requirements are effective for financial statements ofinterim or annual periods ending after December 15, 2002. The adoption of FIN45is not expected to have a material effect on the Company’s financial position,results of operations, or cash flows. 

 

In December2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation --Transition and Disclosure” (SFAS No. 148). SFAS No. 148 amends SFAS No. 123“Accounting for Stock-Based Compensation” (SFAS No. 123) to provide alternativemethods of transition for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation. In addition, SFAS No. 148amends the disclosure requirements of SFAS No. 123 to require prominentdisclosures in both annual and interim financial statements about the method ofaccounting for stock-based employee compensation and the effect of the methodused on reported results. SFAS No. 148 is effective for fiscal years beginningafter December 15, 2002. The interim disclosure provisions are effective forfinancial reports containing financial statements for interim periods beginningafter December 15, 2002. The Company does not expect the adoption of SFAS No.148 to have a material effect on the Company’s financial position, results ofoperations, or cash flows. 

 

3.               NOTESRECEIVABLE

 

On September 30, 1999, the Company entered into a purchase and saleagreement with a former stockholder and employee to sell the rights andcontracts to provide certain information technology services to customerspreviously serviced by the Company’s Information Technology Division.  The sale price, in the amount of $270,000,was provided through a note agreement between the Company and the formerstockholder.  The note accrues interestat 8% per annum, is payable in interest-only installments through September2000 and in principal and interest installments through September 2002, theoriginal maturity of the note.  TheCompany granted an extension of maturity through December 31, 2003. At December31, 2002, the outstanding balance of this note was $48,442. 

 

F-12

----

 

In connection with the sale, the Company entered into an additionalnote agreement with the former shareholder in the amount of $50,000.  The note accrued interest at 8% perannum.  The note was paid during 2000.

 

4.               PROPERTYAND EQUIPMENT

 

Property andequipment consists of the following at December 31, 2002 and 2001:

 
|                           |   | **2002**   |       | **2001**   |   |
|--------------------------------|--------|------------|------------|------------|--------|
|                           |   |       |       |       |   |
| Land                           |   | $          | 4,562,066  |       | $      | 4,562,066 |   |
| Building                       |   | 6,919,217  |       | 2,979,296  |   |
| Copiers                        |   | 3,109,846  |       | 4,537,977  |   |
| Computers, equipment and other |   | 6,628,272  |       | 8,101,224  |   |
| Vehicles                       |   | 508,253    |       | 485,001    |   |
|                           |   | 21,727,654 |       | 20,665,564 |   |
| Less: accumulated depreciation |   | (6,833,551 | )          | (5,731,795 | )      |
|                           |   |       |       |       |   |
|                           |   | $          | 14,894,103 |       | $      | 14,933,769 |   |

 

Depreciationexpense, including depreciation on equipment under capital leases, was$2,433,637, $2,204,559, and $1,571,818 for the years ended December 31, 2002,2001 and 2000, respectively.

 

On November16, 2000, the Company purchased certain property consisting of land ofapproximately $4.6 million and buildings of approximately $2.9 million for useas its corporate headquarters and as an operating facility for totalconsideration of $7.5 million.  Inconnection with the purchase, the Company entered into a note agreement with abank in the amount of $5,800,000 (see Note 7).

 

At December31, 2002 and 2001, the Company had $359,890 and $495,000 of equipment financedthrough capital leases.  The accumulateddeprecation on these equipment was $187,910, and $125,617.

 

5.               IMPAIRMENTOF GOODWILL

 

During 2000,the Company acquired Legend Lithographics, Inc. and Pseudon Communications,Inc. (collectively, “Legend”), a digital printing and copying company, for$438,172. The Company also acquired Duplicating and Design, Inc. (“D&D”), adigital printing and graphic design company for $741,078.  The Company recorded goodwill of $312,848and $741,078 respectively, associated with the Legend and the D&Dacquisitions.  The acquired businesseswere operated as two independent business units from the date of acquisition. 

 

Upon adoptingSFAS No. 142, the Company determined the recorded goodwill was business unitlevel goodwill.  During the thirdquarter of 2002, Legend sustained greater than anticipated losses due togeneral unfavorable market conditions. As a result, the Company revised its financial forecast for Legend.Based on the revised outlook, the Company performed an impairment assessment ofthe carrying amount of the associated goodwill and concluded that the carryingamount of goodwill was not recoverable. The Company recorded an impairment charge for the full carrying amountof $258,107.  This charge was recordedwithin the Digital Printing segment and has been included in the impairmentcharge in the Statements of Operations.

 

F-13

----

 

6.               ACCRUEDAND OTHER LIABILITIES

 

Accrued andother liabilities consist of the following at December 31, 2002 and 2001:

 
|                                                |   | **2002** |      | **2001** |   |
|-----------------------------------------------------|--------|----------|-----------|----------|--------|
|                                                |   |     |      |     |   |
| Accrued salaries, bonus, taxes and fringe  benefits |   | $        | 653,433   |     | $      | 361,592 |   |
| Accrued commissions                                 |   | 203,623  |      | 100,511  |   |
| Accrued sales tax payable                           |   | 146,874  |      | 136,855  |   |
| Other accrued liabilities                           |   | 234,098  |      | 140,014  |   |
|                                                |   |     |      |     |   |
|                                                |   | $        | 1,238,028 |     | $      | 738,972 |   |

 

7.               LINEOF CREDIT AND OTHER DEBT

 

At December31, 2002, the Company has a working capital line of credit with a bank in theamount of $7,000,000.  The workingcapital line of credit is collateralized by accounts receivable and certainequipment as described in the underlying agreement.  The Company has the capacity to borrow, at any given time, thelesser of the established line of credit or eligible accounts receivable,generally defined as 75% of accounts receivable that are less than 120 daysold.  On March 24, 2003 the Company renewed the line of credit agreementto extend the maturity of the credit line to May 31, 2004.  The line of credit bears interest at thelesser of the bank’s prime rate or the 30-day LIBOR plus 2.20% (3.58% atDecember 31, 2002).  At December 31,2002, total borrowings of  $2,861,414were outstanding under the agreement. At December 31, 2002, the Company had available to borrow under the lineof credit approximately $2.6 million.  

 

The Company’sother debt is summarized as follows:

 
|                                   |   | **Interest  Rate** |   | **Principal  payment** |   | **Maturity**  |         | **December  31,** |      |
|----------------------------------------|--------|--------------------|--------|------------------------|--------|---------------|--------------|-------------------|-----------|
| **2002**                               |   | **2001**           |
| Promissory note (mortgage)             |   | 9.48               | %      | See below              |   | November 2007 |         | $                 | 5,413,869 |   | $ | 5,610,761 |   |
| Term notes ($316,000)                  |   | 8.75               | %      |                   |   |          |         | —            |      | 45,596 |   |
| Term note ($1,780,300)                 |   | LIBOR+2.5          | %      | $                      | 29,672 |          | August 2006  |              | 1,275,876 |   | 1,632,240 |   |
| Term note ($1,125,000)                 |   | LIBOR+2.5          | %      | $                      | 31,250 |          |         |              | —    |   | 562,500 |   |
| Term note ($1,250,000)                 |   | LIBOR+2.5          | %      | $                      | 34,722 |          | October 2005 |              | 1,180,431 |   | — |   |
| Duplicating & Design purchase note |   |               |   |                   |   |          |         | —            |      | 233,333 |   |
| Capital lease obligations (Note 8)     |   |               |   |                   |   |          |         | 128,630           |      | 260,760 |   |
|                                   |   |               |   |                   |   |          |         | 7,998,806         |      | 8,345,190 |   |
| Less current portion                   |   |               |   |                   |   |          |         | (1,101,706        | )         | (1,314,396 | ) |
|                                   |   |               |   |                   |   |          |         |              |      |   |   |
| Long term debt                         |   |               |   |                   |   |          |         | $                 | 6,897,100 |   | $ | 7,030,794 |   |

 

At December31, 2002, the Company had a mortgage note payable (Mortgage) with a carryingamount of $5,413,869.  The mortgage wasto fund the purchase of the Alexandria, Virginia property.  In order to manage interest costs andexposure to changing interest rates on the mortgage loan, the Company enteredinto an interest rate swap agreement in which the interest rate is fixed at9.48%.  Under the terms of the note andrelated interest rate swap agreements, the Company is required to make monthlyprincipal and interest payments in the aggregate of $60,495 for a period ofseven years, and a lump-sum payment of $4,155,254 when the note becomes due inOctober 2007.

 

F-14

----

 

In September2002, the Company entered into a note payable in the amount of $1,250,000(Note).  The note was obtained to createadditional borrowing capacity, in the event it is needed.  Under the terms of the note, the Company isrequired to make monthly principal and interest payments in the aggregate of$34,722 for a period of three years. The unpaid principal amount bears interest at a fluctuating annual rateequal to the 1 – Month LIBOR plus 2.50%. 

 

The Companyhas obtained financing for certain equipment (Equipment Financing) in theaggregate amount of  $1,780,300 as ofDecember 31, 2002.  The underlying notesare secured by the underlying equipment and accrues interest at a rate of the30-day LIBOR plus 2.50% and matures in August 2006.  

 

The Mortgage,the Note, the Equipment Financing, and the line of credit arrangements wereobtained from the same bank.  As ofDecember 31, 2002 the total borrowing from the bank was $10,731,590.  The underlying agreements related to thesedebts provide a cross-default protection provisions to the lender and requirecertain financial covenants.  Asignificant covenant requires the Company to maintain an Interest CoverageRatio, as defined, in excess of 2.0:1. For the quarters ended March 31, 2002 and June 30, 2002 the Company wasin compliance with the Interest Coverage Ratio. During the quarter endedSeptember 30, 2002, due to a significant quarterly net loss, the Company wasnot in compliance with this covenant. As a result, the Company obtained a waiver of the covenant for the thirdand fourth quarters of 2002.  TheCompany met all other financial covenants throughout the year in 2002 and wasin compliance with all covenants at December 31, 2002.  During the first quarter of 2003, the bankmodified the Interest Coverage Ratio to be 1.75:1 for the quarters ended March31, 2003 and June 30, 2003, after which the ratio reverts back to 2.0:1. Themodification also allows the exclusion of certain charges, deemed as one timein nature, from the computation of the Interest Coverage Ratio, with advanceapproval from the bank.  The Company hasreceived approval to exclude charges related to the results of the closedArizona office, and the write-off of goodwill related to the Company’s printingdivision.  The Company expects to remainin compliance with all of the covenants within the next twelve months followingDecember 31, 2002.  In the event theCompany is not in compliance with the debt covenants, the bank has the right tocall for immediate payments on some or all debt borrowings covered under thedebt agreements with the bank. If such an event were to occur, the Company maybe forced to seek alternative sources of funding.  The Company does not believe such an event is likely tooccur.  

 

Aggregatematurities of long-term debt for the five years following December 31, 2002 andthereafter are as follows:

 

| **Year**   |   | **Amount** |      |
|------------|--------|------------|-----------|
| 2003       |   | $          | 1,101,706 |   |
| 2004       |   | 1,023,732  |      |
| 2005       |   | 963,451    |      |
| 2006       |   | 494,011    |      |
| 2007       |   | 4,415,906  |      |
| Thereafter |   | —     |      |
|       |   |       |      |
|       |   | $          | 7,998,806 |   |

 

8.               COMMITMENTSAND CONTINGENCIES

 

The Companyhas entered into employment agreements with its officers and certainemployees.  The agreements provide forbase salaries, contingent incentive compensation based on achievement ofcertain sales and other 

 

F-15

----

 

goals,non-compete and nondisclosure restrictions and, in certain cases, stockoptions, which vest over time.  Theagreements are terminable at the discretion of the Company.

 

The Companyleases its office facilities, copiers and office equipment under variousoperating and capital leases.  Leaseterms range from one to approximately six years.  Minimum annual rental and lease commitments for leases with aremaining term of one year or more at December 31, 2002, are as follows:

 
| **Year ending December 31,**                |   | **Capital leases** |    | **Operating leases** |   |
|---------------------------------------------|--------|--------------------|---------|----------------------|--------|
|                                        |   |               |    |                 |   |
| 2003                                        |   | $                  | 119,785 |                 | $      | 2,030,591 |   |
| 2004                                        |   | 15,980             |    | 1,804,773            |   |
| 2005                                        |   | —             |    | 1,207,698            |   |
| 2006                                        |   | —             |    | 928,960              |   |
| 2007                                        |   | —             |    | 534,473              |   |
| Thereafter                                  |   | —             |    | 434,102              |   |
|                                        |   |               |    |                 |   |
| Total minimum lease payments                |   | $                  | 135,765 |                 | $      | 6,940,597 |   |
|                                        |   |               |    |                 |   |
| Less:   interest                       |   | (7,135             | )       |                 |   |
|                                        |   |               |    |                 |   |
| Present value of net minimum lease payments |   | $                  | 128,630 |                 |   |   |

 

Interestexpense on the outstanding obligations under capital leases was approximately$20,917, $37,227 and $33,444 for the years ended December 31, 2002, 2001 and2000, respectively.

 

Rent expensewas $2,214,834, $2,586,971, and $2,512,366 for the years ended December 31,2002, 2001 and 2000, respectively. 

 

9.               STOCKHOLDERS’EQUITY

 

Incentive Stock Options Plan 

 

The Company’s stock award plans consist ofthe 2000 Broad Based Option Plan (2000 Plan) and the 1998 Stock Incentive Plan(1998 Plan). Shares reserved under these plans consist of 250,000 shares in the2000 Plan and 1,952,000 shares in the 1998 Plan.  The two plans are administered by the Board of Directors.  Under the terms of the plans, options may begranted to the Company’s employees to purchase shares of common stock.  Options become exercisable ratably over avesting period, as determined by the Board of Directors, normally quarterly overa three-year period, and expire over terms not exceeding 10 years from the dateof grant, three months after termination of employment, or one year after thedeath or permanent disability of the employee. The Board of Directors determines the option price (not less than fairmarket value of the underlying common stock) at the date of grant.

 

During 2002, 2001 and 2000, the Companygranted options for 212,500, 509,500 and 936,500 shares of common stock,respectively.  The grant price per sharewas equal or greater than the fair market price of the common stock at the dateof grant.  As of December 31, 2002, 2001and 2000, options for 1,005,492, 1,243,046 and 422,757 of the shares are vestedwith the remainder scheduled to vest through December 2005.  The options expire through 2007.

 

F-16

----

 

The followingdepicts activity in the plans for three years ended December 31, 2002:

 
|                           |   | **Shares** |   | **Exercise  price** |       |
|--------------------------------|--------|------------|--------|---------------------|------------|
|                           |   |       |   |                |       |
| Outstanding, December 31, 1999 |   | 1,178,958  |   | $                   | 1.10-3.44  |   |
| Options granted                |   | 936,500    |   | 1.75-4.625          |       |
| Options exercised              |   | 205,546    |   | 1.11-3.250          |       |
| Options expired                |   | 194,844    |   | 2.25-4.625          |       |
|                           |   |       |   |                |       |
| Outstanding, December 31, 2000 |   | 1,715,068  |   | 1.10-4.625          |       |
| Options granted                |   | 509,500    |   | 1.31-2.45           |       |
| Options exercised              |   | 197,044    |   | 1.13-2.125          |       |
| Options expired                |   | 534,853    |   | 1.75-4.625          |       |
|                           |   |       |   |                |       |
| Outstanding, December 31, 2001 |   | 1,492,671  |   | 1.10-4.625          |       |
| Options granted                |   | 212,500    |   | 1.80-3.60           |       |
| Options exercised              |   | 334,981    |   | 1.125-3.00          |       |
| Options expired                |   | 236,698    |   | 1.25-4.625          |       |
|                           |   |       |   |                |       |
| Outstanding, December 31, 2002 |   | 1,133,492  |   | $                   | 1.13-4.625 |   |

 

Treasury Stock

 

In December1999, the Company’s Board of Directors authorized the Company to repurchase upto 500,000 shares of common stock. During 2000 and 1999 the Company repurchased, through open market andnegotiated transactions, 102,300 shares of stock at an aggregate price of$371,152.  Prior to 1999, the Companyheld 11,290 shares of treasury stock at an aggregate cost of $25,000.  The Company did not buy back any commonstock during 2002 or 2001, and currently does not plan to repurchase additionalcommon stock.  The Company held treasurystock of 113,590 shares of common stock at a cost of $396,152 as of December31, 2002 and 2001, respectively.

 

Comprehensive Income (Loss)

 

The changes inthe components of comprehensive income were as follows:

 
|                                    |   | **For the  Years Ended December 31,** |     |
|-----------------------------------------|--------|---------------------------------------|----------|
|                                    |   | **2002**                              |     | **2001** |   | **2000** |   |
| Net income                              |   | $                                     | 137,018  |   | $ | 1,295,060 |   | $ | 942,413 |   |
| Other comprehensive loss:               |   |                                  |     |   |   |   |   |
|                                    |   |                                  |     |   |   |   |   |
| Interest rate swap contract, net of tax |   | (551,545                              | )        | — |   | — |   |
|                                    |   |                                  |     |   |   |   |   |
| Comprehensive (loss) income             |   | $                                     | (414,527 | ) | $ | 1,295,060 |   | $ | 942,413 |   |

 

F-17

----

 

10.         EARNINGSPER SHARE

 

The following represents the calculation forearnings per share:

 
|                                      |   | **For the  Years Ended December 31,** |    |
|-------------------------------------------|--------|---------------------------------------|---------|
|                                      |   | **2002**                              |    | **2001** |   | **2000** |   |
| Net income                                |   | $                                     | 137,018 |   | $ | 1,295,060 |   | $ | 942,413 |   |
| Weighted average shares outstanding       |   |                                  |    |   |   |   |   |
| Common stock                              |   | 5,392,266                             |    | 5,145,291 |   | 4,870,825 |   |
| Stock options                             |   | 227,906                               |    | 146,375 |   | 450,118 |   |
| Common stock and common stock equivalents |   | 5,620,172                             |    | 5,291,666 |   | 5,320,943 |   |
|                                      |   |                                  |    |   |   |   |   |
| Basic and diluted earnings per share      |   |                                  |    |   |   |   |   |
| Basic                                     |   | $                                     | 0.03    |   | $ | 0.25 |   | $ | 0.19 |   |
| Diluted                                   |   | $                                     | 0.02    |   | $ | 0.24 |   | $ | 0.18 |   |

 

For the yearsended December 31, 2002, 2001 and 2000, 905,586, 582,851, and 531,798 stockoptions, respectively were excluded from the computation of diluted earningsper share, as their inclusion would have been anti-dilutive.

 

11.         RESTRUCTURINGRELATED ACTIVITIES

 

On October 15,2002, the Company ceased production at its facility in Tempe, Arizona, as aresult of a strategic decision to focus on larger geographic markets forgrowth, and to minimize current losses. The equipment from this facility were distributed to the Company’s otherfacilities.  The lease for the Arizonafacility expires in August 2003. The Company plans to sublease the facilityuntil the lease expires.  The Companydoes not expect losses from the subleasing arrangement, if any, to be material.  

 

During thefourth quarter of 2002 the Company implemented several cost cutting initiativesin order to realign costs with current revenue trends.  These measures included the closing of theCompany’s Arizona office, termination of employees, and the reduction ofmiscellaneous expenditures.  Allliabilities associated with these activities were paid in full as of December31, 2002.  

 

12.         MERGERAGREEMENT

 

In July 2000,the Company entered into a definitive merger agreement with U.S. TechnologiesInc. (“U.S. Technologies”) pursuant to which U.S. Technologies would acquire theCompany.  On April 2, 2001, the Companyexercised its option to terminate the merger agreement.  In connection with the proposed transaction,the Company incurred $330,807 of merger related costs, which were expensed inthe fourth quarter of 2000.

 

 

 

F-18

----

 

13.         INCOMETAXES

 

Abreakdown of current and deferred tax expense for the years ended December 31,2002, 2001, and 2000 is as follows: 

 

 
|                           |   | **For the  Years Ended December 31,** |   |
|--------------------------------|--------|---------------------------------------|--------|
|                           |   | **2002**                              |   | **2001** |   | **2000** |   |
| Current tax (benefit) expense  |   | $                                     | (5,518 | ) | $ | 1,242,078 |   | $ | 583,552 |   |
| Deferred tax expense (benefit) |   | 91,048                                |   | (291,610 | ) | 338,470 |   |
|                           |   | $                                     | 85,530 |   | $ | 950,468 |   | $ | 922,022 |   |

 

Areconciliation of the Company’s effective tax rate as a percentage of incomebefore taxes and federal 

statutory rate for the years ended December 31, 2002, 2001 and 2000 issummarized as follows: 

 
|                   |   | **For the  Years Ended December 31,** |   |
|------------------------|--------|---------------------------------------|--------|
|                   |   | **2002**                              |   | **2001** |   | **2000** |   |
| Federal statutory rate |   | 34.00                                 | %      | 34.00 | % | 34.00 | % |
| State income taxes     |   | 9.20                                  |   | 9.56 |   | 8.20 |   |
| Other                  |   | (4.77                                 | )      | (1.24 | ) | 7.25 |   |
|                   |   | 38.43                                 | %      | 42.32 | % | 49.45 | % |

 

The Companyprovides deferred taxes for temporary differences between the bases of assetsand liabilities for financial reporting purposes and the bases of assets andliabilities for tax return purposes. The net deferred tax assets (liabilities)at December 31, 2002 and 2001 are attributable to the following:

 
|                                     |   | **2002** |     | **2001** |   |
|------------------------------------------|--------|----------|----------|----------|--------|
| Current deferred tax assets:             |   |     |     |     |   |
| Allowance for doubtful accounts          |   | $        | 104,608  |     | $      | 140,972 |   |
| Net current deferred tax assets          |   | $        | 104,608  |     | $      | 140,972 |   |
|                                     |   |     |     |     |   |
| Non-current deferred tax assets:         |   |     |     |     |   |
| Goodwill amortization                    |   | $        | 78,979   |     | $      | 22,280 |   |
| Deferred rent                            |   | 100,905  |     | 87,539   |   |
| Interest rate swap                       |   | 361,761  |     | —   |   |
|                                     |   | 541,645  |     | 109,819  |   |
| Non-current deferred tax liabilities:    |   |     |     |     |   |
| Depreciation                             |   | (808,491 | )        | (683,742 | )      |
|                                     |   |     |     |     |   |
| Net non-current deferred tax liabilities |   | $        | (266,846 | )        | $      | (432,951 | ) |

 

AtDecember 31, 2002, the Company had an income tax refundable balance ofapproximately $606,000, related to the overpayment of estimated taxexpense. 

 

14.         EMPLOYEEBENEFIT PLAN

 

The Company sponsors a plan to provideretirement benefits under the provision of Section 401(k) of the InternalRevenue Code (the 401(k) Plan) for all employees who have completed one year ofservice and have

 

F-19

----

 

reached their 21st birthday.  Company contributions may range from 0% to100% of employee contributions. Employees may elect to contribute up to 80% of their eligible compensationon a pretax basis.  Benefits under the401(k) Plan are limited to the assets of the 401(k) Plan.  During the years ended December 31, 2002,2001 and 2000, respectively, the Company made no contributions to the 401(k)Plan.

 

15.         SEGMENTINFORMATION

 

The Company isorganized and operates in three significant segments: reprographics, imaging,and digital printing services.  UntilDecember 31, 2001, the Company also had a facility management services segment.This segment was significantly reduced during the first quarter of 2002, asmost of the service contracts were terminated by the Company.  At December 31, 2002, the Company has onesuch contract remaining.  Managementdoes not view facility management services as a separate segment for the yearended December 31, 2002.  In the summaryof the results of the Company’s operating segments below, the results for theremaining facility management contract for the year ending December 31, 2002are listed under the heading other. Prior year amounts related to facility management services have beenrestated into other to conform to current year presentation.

 

Reprographicsinvolves the copying and management of large amounts of documents extracted intheir original format, from the offices and files of customers.  Reprographic services include copying,binding, drilling, labeling, collating, assembling and quality review.  The Company’s reprographic centers,currently located in Virginia, New York, Pennsylvania, Georgia, Illinois,Delaware, and Arizona (through October 15, 2002), are open 24 hours a day,seven days a week to handle the prompt turn-around time often requested bycustomers. A typical job ranges in size from single documents with a smallnumber of pages to multiple sets of documents, which can exceed a millionpages. A job is typically picked up by the Company’s in-house dispatch serviceand brought back to its production center. The jobs are then processed per thecustomer’s instructions and reviewed by the quality control staff. Documentsare returned to the client via the Company’s dispatch service. Reprographicjobs are generally billed on a job-by-job basis, based on the number of copiesand the level of difficulty in copying the original documents.

 

Imagingservices involves the conversion or transfer of the traditional paper andelectronic documents into electronic media or vice-versa. Services provided inthe imaging services division primarily cater to law firms. A typical jobinvolves a law firm that is representing a client in a litigation matter. Inorder for the law firm to prepare for its case, it often must review a largenumber of documents, emails, and email attachments. As a result, the law firmsoften have a need to search and retrieve appropriate documents in a timely andefficient manner. In order to help meet this need, the imaging servicesdivision offers case management consulting, electronic scanning of documents,converting email, attachments and other electronic files to images,indexing/coding, optical character recognition, electronic discovery, blowbackprinting, training, technical support and electronic document search andretrieval services. Imaging services are typically billed on a job-by-jobbasis, based on the number of images and complexity of the retrievalapplications.

 

Digitalprinting services include both black and white and color digital production ofcatalogs, brochures, postcards, stationary, direct mail, newsletters, andexhibit materials.  Typical customersinclude organizations requiring print media. In addition, ancillary services,which include graphic design, mailing, special finishing, storage, fulfillment,and delivery services are provided through the digital printing segment.Printing jobs are typically billed on a job-by-job basis depending on severalfactors, including quantity, number of colors, quality of paper, and graphicdesign time.

 

The Companyevaluates its segments’ performance based on revenue and profit and loss fromoperations before allocation of corporate administrative expenses and incometaxes.  A summary of the results of theCompany’s operating segments is as follows:

 

F-20

----

 
|                      |   | **For the  Years Ended December 31,** |       |
|---------------------------|--------|---------------------------------------|------------|
|                      |   | **2002**                              |       | **2001** |   | **2000** |   |
| Revenue:                  |   |                                  |       |   |   |   |   |
| Reprographics             |   | $                                     | 18,682,914 |   | $ | 22,572,613 |   | $ | 21,111,105 |   |
| Imaging                   |   | 14,400,395                            |       | 11,371,985 |   | 9,486,070 |   |
| Digital printing          |   | 3,035,010                             |       | 2,958,697 |   | 1,853,170 |   |
| Other                     |   | 1,115,739                             |       | 2,556,858 |   | 3,039,566 |   |
| Inter-segment elimination |   | (157,554                              | )          | — |   | — |   |
|                      |   |                                  |       |   |   |   |   |
| Total revenue             |   | $                                     | 37,076,504 |   | $ | 39,460,153 |   | $ | 35,489,911 |   |

 
|                              |   | **For the  Years Ended December 31,** |      |
|-----------------------------------|--------|---------------------------------------|-----------|
|                              |   | **2002**                              |      | **2001** |   | **2000** |   |
| Income before taxes:              |   |                                  |      |   |   |   |   |
| Reprographics                     |   | $                                     | 2,889,331 |   | $ | 4,545,666 |   | $ | 1,217,977 |   |
| Imaging                           |   | 4,384,210                             |      | 3,326,065 |   | 4,355,535 |   |
| Digital printing                  |   | (477,496                              | )         | (734,486 | ) | (419,567 | ) |
| Other                             |   | 230,736                               |      | 183,478 |   | 411,607 |   |
| Corporate administrative expenses |   | (6,804,233                            | )         | (5,075,195 | ) | (3,701,117 | ) |
|                              |   |                                  |      |   |   |   |   |
| Total income before taxes         |   | $                                     | 222,548   |   | $ | 2,245,528 |   | $ | 1,864,435 |   |

 

16.         QUARTERLYRESULTS OF OPERATIONS (UNAUDITED)

 
| **2002**            |   | **First** |      | **Second** |   | **Third**  |   | **Fourth** |      |
|---------------------|--------|-----------|-----------|------------|--------|------------|--------|------------|-----------|
|                |   |      |      |       |   |       |   |       |      |
| Revenue             |   | $         | 8,850,235 |       | $      | 10,314,192 |   | $          | 8,594,999 |   | $ | 9,317,078 |   |
|                |   |      |      |       |   |       |   |       |      |
| Gross profit        |   | 3,321,376 |      | 4,633,200  |   | 2,718,049  |   | 3,598,040  |      |
|                |   |      |      |       |   |       |   |       |      |
| Net income (loss)   |   | 119,975   |      | 541,474    |   | (619,517   | )      | 95,086     |      |
|                |   |      |      |       |   |       |   |       |      |
| Earnings per share: |   |      |      |       |   |       |   |       |      |
| Basic               |   | 0.02      |      | 0.10       |   | (0.11      | )      | 0.02       |      |
| Diluted             |   | 0.02      |      | 0.10       |   | (0.11      | )      | 0.01       |      |
|                     |        |           |           |            |        |            |        |            |           |  |  |  |  |

 

F-21

----

 
| **2001**            |   | **First** |      | **Second** |   | **Third**  |   | **Fourth** |       |
|---------------------|--------|-----------|-----------|------------|--------|------------|--------|------------|------------|
|                |   |      |      |       |   |       |   |       |       |
| Revenue             |   | $         | 9,449,649 |       | $      | 10,332,382 |   | $          | 10,609,923 |   | $ | 9,068,199 |   |
|                |   |      |      |       |   |       |   |       |       |
| Gross profit        |   | 3,086,684 |      | 3,678,731  |   | 3,646,182  |   | 2,766,393  |       |
|                |   |      |      |       |   |       |   |       |       |
| Net income          |   | 242,180   |      | 420,233    |   | 410,182    |   | 222,465    |       |
|                |   |      |      |       |   |       |   |       |       |
| Earnings per share: |   |      |      |       |   |       |   |       |       |
| Basic               |   | .05       |      | .09        |   | .08        |   | .03        |       |
| Diluted             |   | .05       |      | .08        |   | .08        |   | .03        |       |
|                     |        |           |           |            |        |            |        |            |            |  |  |  |  |

 

F-22

----

 

SCHEDULE II –VALUATION AND QUALIFYING ACCOUNTS

 
|                            |   | **Balance at  Beginning of  Period** |    | **Additions  Charged to Costs  and Expense** |   | **Deductions(1)** |   | **Balance at  End  of Period** |    |
|---------------------------------|--------|--------------------------------------|---------|----------------------------------------------|--------|-------------------|--------|--------------------------------|---------|
|                            |   |                                 |    |                                         |   |              |   |                           |    |
| Year ended December 31, 2002    |   |                                 |    |                                         |   |              |   |                           |    |
| Allowance for doubtful accounts |   | $                                    | 349,278 |                                         | $      | 49,615            |   | $                              | 134,797 |   | $ | 264,096 |   |
|                            |   |                                 |    |                                         |   |              |   |                           |    |
| Year ended December 31, 2001    |   |                                 |    |                                         |   |              |   |                           |    |
| Allowance for doubtful accounts |   | $                                    | 439,278 |                                         | $      | (90,000           | )      | $                              | —  |   | $ | 349,278 |   |
|                            |   |                                 |    |                                         |   |              |   |                           |    |
| Year ended December 31, 2000    |   |                                 |    |                                         |   |              |   |                           |    |
| Allowance for doubtful accounts |   | $                                    | 544,417 |                                         | $      | 194,286           |   | $                              | 299,425 |   | $ | 439,278 |   |

 

----

(1) Net Write-offs ofun-collectible accounts

 

F-23

----