**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For thequarterly period ended September 30, 2002**

 

**CommissionFile No. 0-20947**

 
| **ON-SITE  SOURCING, INC.**                                      |
|------------------------------------------------------------------|
| (Exact name of registrant as specified in its charter)           |
|                                                             |   |   |
| **DELAWARE**                                                     |   | **54 –  1648470** |
| (State or other  jurisdiction of  Incorporation or organization) |   | (I.R.S.  Employer Identification Number) |

 

 
| **832  North Henry Street, Alexandria, Virginia 22314**                             |
|-------------------------------------------------------------------------------------|
| (Address of principal  executive offices)                                           |
|                                                                                |
|                                                                                |
| **(703)  276-1123**                                                                 |
| (Registrant’s telephone  number)                                               |
|                                                                                |
| **NONE**                                                                            |
| (Former name, former  address and former fiscal year, if changed since last report) |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

Yes ý  No o.

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of November 14, 2002:

 
| Common Stock, $.01 par  value |   | 5,475,650 shares |
|-------------------------------|--------|------------------|

 

 

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ON-SITE SOURCING, INC.

INDEX

 
| **Part I.**  | **Financial  Information**                                                                                                   |
|--------------|------------------------------------------------------------------------------------------------------------------------------|
|         |                                                                                                                         |
| Item 1.      | Financial Statements:  Balance Sheets as of September 30, 2002 (unaudited)  and December 31, 2001                            |
|         |                                                                                                                         |
|         | Statements of Operations for  the Three and Nine Months  Ended September 30, 2002 (unaudited) and 2001 (unaudited)           |
|         |                                                                                                                         |
|         | Condensed Statements  of Cash Flows for the Three and Nine Months  Ended September 30, 2002 (unaudited) and 2001 (unaudited) |
|         |                                                                                                                         |
|         | Notes to Financial  Statements – September 30, 2002                                                                     |
|         |                                                                                                                         |
| Item  2.     | Management’s  Discussion and Analysis of Financial  Condition and Results of Operations and Liquidity                   |
|         |                                                                                                                         |
| Item  3.     | Quantitative  and Qualitative Disclosures About Market Risk                                                                  |
|         |                                                                                                                         |
| Item 4.      | Controls and Procedures                                                                                                      |
|         |                                                                                                                         |
| **Part II.** | **Other Information**                                                                                                        |
|         |                                                                                                                         |
| Item 1.      | Legal Proceedings                                                                                                            |
|         |                                                                                                                         |
| Item 2.      | Changes in  Securities and Use of Proceeds                                                                                   |
|         |                                                                                                                         |
| Item 3.      | Defaults Upon Senior  Securities                                                                                             |
|         |                                                                                                                         |
| Item  4.     | Submission  of Matters to a Vote of Security Holders                                                                         |
|         |                                                                                                                         |
| Item 5.      | Other Information                                                                                                            |
|         |                                                                                                                         |
| Item 6.      | Exhibits and Reports on Form 8-K                                                                                             |

 

2

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ON-SITESOURCING, INC.

BALANCE SHEETS

 
|                                                                                                                             |   | **September  30,  2002** |       | **December  31,  2001** |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|------------|-------------------------|--------|
|                                                                                                                             |   | **(Unaudited)**          |       |                    |   |
| ASSETS                                                                                                                           |   |                     |       |                    |   |
|                                                                                                                             |   |                     |       |                    |   |
| CURRENT ASSETS:                                                                                                                  |   |                     |       |                    |   |
| Cash and cash  equivalents                                                                                                       |   | $                        | 4,531      |                    | $      | 3,282 |   |
| Accounts  receivable, net                                                                                                        |   | 8,683,412                |       | 8,103,379               |   |
| Prepaid supplies                                                                                                                 |   | 505,384                  |       | 611,988                 |   |
| Prepaid expenses                                                                                                                 |   | 145,096                  |       | 242,818                 |   |
| Prepaid income  taxes                                                                                                            |   | 295,680                  |       | 38,303                  |   |
| Deferred tax  asset                                                                                                              |   | 156,489                  |       | —                  |   |
| Notes  receivable, current portion                                                                                               |   | 59,855                   |       | 151,580                 |   |
| Total current  assets                                                                                                            |   | 9,850,447                |       | 9,151,350               |   |
|                                                                                                                             |   |                     |       |                    |   |
| Property and  equipment, net                                                                                                     |   | 15,728,135               |       | 14,933,769              |   |
| OTHER ASSETS                                                                                                                     |   |                     |       |                    |   |
| Goodwill                                                                                                                         |   | 648,443                  |       | 906,551                 |   |
| Income taxes  refundable                                                                                                         |   | 198,969                  |       |                    |   |
| Other assets                                                                                                                     |   | 151,699                  |       | 167,258                 |   |
| Total assets                                                                                                                     |   | $                        | 26,577,692 |                    | $      | 25,158,928 |   |
|                                                                                                                             |   |                     |       |                    |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                       |   |                     |       |                    |   |
|                                                                                                                             |   |                     |       |                    |   |
| CURRENT  LIABILITIES:                                                                                                            |   |                     |       |                    |   |
| Line of credit                                                                                                                   |   | $                        | 3,882,165  |                    | $      | 3,120,166 |   |
| Current portion  of long-term debt                                                                                               |   | 1,443,651                |       | 1,314,396               |   |
| Accounts payable                                                                                                                 |   | 1,788,272                |       | 2,759,191               |   |
| Accrued and  other liabilities                                                                                                   |   | 1,301,733                |       | 738,972                 |   |
| Deferred income  taxes                                                                                                           |   | —                   |       | 58,735                  |   |
| Total current  liabilities                                                                                                       |   | 8,415,821                |       | 7,991,460               |   |
|                                                                                                                             |   |                     |       |                    |   |
| NONCURRENT  LIABILITIES                                                                                                          |   |                     |       |                    |   |
| Long-term debt,  net of current portion                                                                                          |   | 7,080,266                |       | 7,030,794               |   |
| Deferred rent                                                                                                                    |   | 240,505                  |       | 217,143                 |   |
| Deferred income  taxes                                                                                                           |   | 131,657                  |       | 374,216                 |   |
| Interest rate  swap contract                                                                                                     |   | 925,757                  |       | —                  |   |
| Total  liabilities                                                                                                               |   | 16,794,005               |       | 15,613,613              |   |
|                                                                                                                             |   |                     |       |                    |   |
| Commitments and  contingencies                                                                                                   |   |                     |       |                    |   |
|                                                                                                                             |   |                     |       |                    |   |
| STOCKHOLDERS’  EQUITY:                                                                                                      |   |                     |       |                    |   |
| Common stock, $0.01 par value, 20,000,000 shares authorized  5,589,240 and 5,254,259 shares issued and outstanding, respectively |   | 55,892                   |       | 52,543                  |   |
| Additional  paid-in capital                                                                                                      |   | 7,883,294                |       | 7,131,139               |   |
| Accumulated  other comprehensive loss                                                                                            |   | (559,064                 | )          | —                  |   |
| Treasury stock,  at cost (113,590 shares)                                                                                        |   | (396,152                 | )          | (396,152                | )      |
| Retained  earnings                                                                                                               |   | 2,799,717                |       | 2,757,785               |   |
| Total  stockholders’ equity                                                                                                 |   | 9,783,687                |       | 9,545,315               |   |
| Total  liabilities and stockholders’ equity                                                                                 |   | $                        | 26,577,692 |                    | $      | 25,158,928 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

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ON-SITE SOURCING, INC.

STATEMENTS OF OPERATIONS

 
|                                  |   | **Three  Months Ended**  |      | **Nine  Months Ended**   |   |
|---------------------------------------|--------|--------------------------|-----------|--------------------------|--------|
|                                  |   | **September  30,  2002** |      | **September  30,  2001** |   | **September  30,  2002** |   | **September  30,  2001** |   |
|                                  |   | **(Unaudited)**          |      | **(Unaudited)**          |   |
|                                  |   |                     |      |                     |   |   |   |   |   |
| Revenue                               |   | $                        | 8,594,999 |                     | $      | 10,609,923 |   | $ | 27,759,426 |   | $ | 30,391,955 |   |
|                                  |   |                     |      |                     |   |   |   |   |   |
| Costs and  expenses:                  |   |                     |      |                     |   |   |   |   |   |
| Cost of sales                         |   | 5,876,950                |      | 6,963,741                |   | 17,086,801 |   | 19,981,701 |   |
|                                  |   | 2,718,049                |      | 3,646,182                |   | 10,672,625 |   | 10,410,254 |   |
|                                  |   |                     |      |                     |   |   |   |   |   |
| Sales and  marketing                  |   | 1,172,087                |      | 1,053,949                |   | 3,553,231 |   | 2,852,399 |   |
| General and  administrative           |   | 2,026,176                |      | 1,522,702                |   | 6,187,748 |   | 4,596,138 |   |
| Impairment of  goodwill               |   | 258,107                  |      | —                   |   | 258,107 |   | — |   |
|                                  |   | 3,456,370                |      | 2,576,651                |   | 9,999,086 |   | 7,448,537 |   |
|                                  |   |                     |      |                     |   |   |   |   |   |
| (Loss) income  from operations        |   | (738,321                 | )         | 1,069,531                |   | 673,539 |   | 2,961,717 |   |
|                                  |   |                     |      |                     |   |   |   |   |   |
| Other income  (expense):              |   |                     |      |                     |   |   |   |   |   |
| Other income                          |   | 15,543                   |      | 82,771                   |   | 73,096 |   | 235,506 |   |
| Other expense                         |   | (35,528                  | )         | (154,319                 | )      | (61,227 | ) | (328,282 | ) |
| Interest expense                      |   | (202,207                 | )         | (307,226                 | )      | (631,541 | ) | (971,646 | ) |
|                                  |   | (222,192                 | )         | (378,774                 | )      | (619,672 | ) | (1,064,422 | ) |
|                                  |   |                     |      |                     |   |   |   |   |   |
| (Loss) income  before taxes           |   | (960,513                 | )         | 690,757                  |   | 53,867 |   | 1,897,295 |   |
| Income tax  (benefit) expense         |   | (340,996                 | )         | 280,575                  |   | 11,935 |   | 824,674 |   |
|                                  |   |                     |      |                     |   |   |   |   |   |
| Net (loss)  income                    |   | $                        | (619,517  | )                        | $      | 410,182 |   | $ | 41,932 |   | $ | 1,072,621 |   |
|                                  |   |                     |      |                     |   |   |   |   |   |
| (Loss) Earnings  per share:           |   |                     |      |                     |   |   |   |   |   |
| Basic                                 |   | $                        | (0.11     | )                        | $      | 0.08 |   | $ | 0.01 |   | $ | 0.21 |   |
| Diluted                               |   | $                        | (0.11     | )                        | $      | 0.08 |   | $ | 0.01 |   | $ | 0.21 |   |
|                                  |   |                     |      |                     |   |   |   |   |   |
| Weighted-average  shares outstanding: |   |                     |      |                     |   |   |   |   |   |
| Basic                                 |   | 5,471,175                |      | 5,098,886                |   | 5,364,472 |   | 4,995,379 |   |
| Diluted                               |   | 5,471,175                |      | 5,340,788                |   | 5,651,747 |   | 5,099,343 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

4

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ON-SITESOURCING, INC.

CONDENSED STATEMENTS OF CASHFLOWS

 
|                                                 |   | **Three  Months Ended  September 30** |    | **Nine  Months Ended  September 30** |   |
|------------------------------------------------------|--------|---------------------------------------|---------|--------------------------------------|--------|
|                                                 |   | **2002**                              |    | **2001**                             |   | **2002** |   | **2001** |   |
|                                                 |   | **Unaudited**                         |    | **Unaudited**                        |   |
| Cash flows from  operating activities:               |   |                                  |    |                                 |   |   |   |   |   |
| Net cash  provided by (used in) operations           |   | $                                     | 683,932 |                                 | $      | (530,993 | ) | $ | 914,460 |   | $ | 1,245,490 |   |
|                                                 |   |                                  |    |                                 |   |   |   |   |   |
| Cash flows from  investing activities:               |   |                                  |    |                                 |   |   |   |   |   |
| Acquisition of  property and equipment               |   | (925,872                              | )       | (583,527                             | )      | (2,636,613 | ) | (1,253,581 | ) |
| Receipt of  payments on notes receivable             |   | 34,969                                |    | 43,485                               |   | 91,725 |   | 75,348 |   |
| Proceeds from  disposition of equipment              |   | —                                |    | —                               |   | 15,777 |   | 15,000 |   |
|                                                 |   |                                  |    |                                 |   |   |   |   |   |
| Net cash used in  investing activities               |   | (890,903                              | )       | (540,042                             | )      | (2,529,111 | ) | (1,163,233 | ) |
|                                                 |   |                                  |    |                                 |   |   |   |   |   |
| Cash flows from  financing activities:               |   |                                  |    |                                 |   |   |   |   |   |
| Proceeds from  sale of common stock                  |   | 15,963                                |    | 272,272                              |   | 675,175 |   | 272,271 |   |
| Proceeds from  collection of subscription receivable |   | —                                |    | —                               |   | — |   | 50,400 |   |
| Payments under  debt agreements                      |   | (499,413                              | )       | (389,509                             | )      | (1,071,273 | ) | (833,800 | ) |
| Long term debt  borrowing                            |   | 1,250,000                             |    | —                               |   | 1,250,000 |   | — |   |
| Borrowings under  line of credit                     |   | 5,554,831                             |    | 5,589,032                            |   | 15,401,613 |   | 15,178,618 |   |
| Payments on line  of credit                          |   | (6,113,910                            | )       | (4,400,406                           | )      | (14,639,615 | ) | (14,748,939 | ) |
|                                                 |   |                                  |    |                                 |   |   |   |   |   |
| Net cash  provided by (used in) financing activities |   | 207,471                               |    | 1,071,389                            |   | 1,615,900 |   | (81,450 | ) |
|                                                 |   |                                  |    |                                 |   |   |   |   |   |
| Net increase in  cash and cash equivalents           |   | 500                                   |    | 354                                  |   | 1,249 |   | 807 |   |
| Cash and cash  equivalents, beginning of period      |   | 4,031                                 |    | 3,881                                |   | 3,282 |   | 3,428 |   |
| Cash and cash  equivalents, end of period            |   | $                                     | 4,531   |                                 | $      | 4,235 |   | $ | 4,531 |   | $ | 4,235 |   |

 

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**ON-SITE SOURCING, INC.**

**NOTESTO FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2002**

**(unaudited)**

 

**1. Nature of Business**

 

On-Site Sourcing, Inc. (the Company) was incorporated in theCommonwealth of Virginia in December 1992 and changed its state ofincorporation to Delaware in January 1996. The Company provides digital imaging, litigation reprographics, andcolor and digital printing to law firms and  other organizations throughout the United States. Services are primarilyperformed in the 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 October 15, 2002, the Company ceased production at itsfacility in Tempe, Arizona as result of a strategic decision to focus on largergeographic markets for growth, and to minimize current losses. The productionfacility represented a component of the Imaging Services Segment.

 

**2. Basis of Presentation**

 

The accompanying unaudited financial statements and related footnoteshave been prepared in accordance with generally accepted accounting principlesfor interim financial information and Article 10 of Regulation S-X.  Accordingly, they do not include all theinformation and footnotes required by generally accepted accounting principlesfor annual reporting periods.  Theinterim financial information, in the opinion of management, reflects alladjustments of a normal recurring nature necessary for a fair statement of theresults for the interim periods.

 

The financial information presented should be read in conjunction withthe Company’s audited financial statements and the notes thereto for the yearended December 31, 2001, as filed with the  Securities and Exchange Commission on Form 10-K.  The results ofoperations for the three and nine-month periods ended September 30, 2002 and2001 may not be indicative of the results for the full year.

 

**3. Summary of Significant AccountingPolicies**

### ** **

RevenueRecognition

 

Revenue is primarily derived from providing reprographics, imaging, anddigital printing services.   The Companyrecognizes revenue from services rendered when the following four revenuerecognition criteria are met: persuasive evidence of an arrangement exists,services have been rendered or delivery has occurred, the selling price isfixed or determinable, and collectibility is reasonably assured.  Return and bad debt allowances are estimatedbased on specific identification and historical information.

 

6

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For services that are completed but not delivered to the customers, norevenue is recognized and the associated costs, estimated based on average unitcosts, are inventoried accordingly. Such costs are included in results of operation during the same periodwhen the related services are delivered and the revenue is recognized.

 

For the year ended December 31, 2001, the Company also derived revenuefrom facility management services.   Revenue on facility management services was recognized on a monthlybasis over the contract term (typically one year) as services were performed.

 

Credit Risks

 

Financial instruments that potentially subject the Company tosignificant concentrations of credit risk consist principally of accountsreceivable.  The Company generally sells its products to law firms andother commercial customers located in the United States.  The Companygrants credit terms without collateral to its customers and has not experiencedany significant credit related losses.  Accounts receivable includeallowances to record receivables at their estimated net realizable value.

 

A customer of the Company, filed for bankruptcy during the thirdQuarter of 2002. The customer represents approximately 8% of accountsreceivable at September 30, 2002.  As a majority of the accountsreceivable from this customer relate to its post-petition transactions, theCompany does not expect any significant losses on such balances.  All accounts receivable from prepetitiontransactions with this customer, which amounted to approximately $50,000, havebeen provided for in the allowance for doubtful accounts.

 

Goodwill

 

In July 2001, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 142, “Goodwill and OtherIntangible Assets.” (“SFAS No. 142”) This statement provides accounting and reporting standards forintangible assets acquired individually, with a group of other assets, or aspart of a business combination.  Underthis statement, goodwill and other intangible assets with indefinite usefullives, on a prospective basis beginning January 1, 2002, will no longer beamortized.  Rather, goodwill and otherindefinite-lived assets must be tested for impairment at least annually basedon a fair value comparison.  Intangibleassets that have finite useful lives will continue to be amortized over theirrespective useful lives.  Upon adoptionof SFAS No. 142, the Company completed a transitional impairment test relatedto its goodwill and determined that no impairment existed. The effect of thisaccounting change is reflected prospectively from January 1, 2002.  Supplemental comparative disclosure, as ifthe change had been retroactively applied to the prior year periods, is asfollows:

 

7

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|                                     |   | **Three Months Ended  September 30** |     | **Nine Months Ended  September 30** |   |
|------------------------------------------|--------|--------------------------------------|----------|-------------------------------------|--------|
|                                     |   | **2002**                             |     | **2001**                            |   | **2002** |   | **2001** |   |
|                                     |   | **(unaudited)**                      |     | **(unaudited)**                     |   |
| Net income:                              |   |                                 |     |                                |   |   |   |   |   |
| Reported net (loss) income               |   | $                                    | (619,517 | )                                   | $      | 410,182 |   | $ | 41,932 |   | $ | 1,072,621 |   |
| Goodwill amortization, net of tax        |   | —                               |     | 15,646                              |   | — |   | 44,684 |   |
| Adjusted net (loss) income               |   | $                                    | (619,517 | )                                   | $      | 425,828 |   | $ | 41,932 |   | $ | 1,117,305 |   |
|                                     |   |                                 |     |                                |   |   |   |   |   |
| Basic (loss) income per share:           |   |                                 |     |                                |   |   |   |   |   |
| Reported net (loss) income per share     |   | $                                    | (0.11    | )                                   | $      | 0.08 |   | $ | 0.01 |   | $ | 0.21 |   |
| Goodwill amortization                    |   | —                               |     | 0.00                                |   | — |   | 0.01 |   |
| Adjusted basic (loss) income per share   |   | $                                    | (0.11    | )                                   | $      | 0.08 |   | $ | 0.01 |   | $ | 0.22 |   |
|                                     |   |                                 |     |                                |   |   |   |   |   |
| Diluted (loss) income per share:         |   |                                 |     |                                |   |   |   |   |   |
| Reported (loss) income per share         |   | $                                    | (0.11    | )                                   | $      | 0.08 |   | $ | 0.01 |   | $ | 0.21 |   |
| Goodwill amortization                    |   | —                               |     | —                              |   | — |   | 0.01 |   |
| Adjusted diluted (loss) income per share |   | $                                    | (0.11    | )                                   | $      | 0.08 |   | $ | 0.01 |   | $ | 0.22 |   |
|                                          |        |                                      |          |                                     |        |  |  |  |  |  |  |  |  |  |

 

Under SFAS No. 142, goodwill is viewed in two separate categories:enterprise-level and business-unit level. Enterprise-level goodwill resultsfrom acquisitions of businesses that have been fully integrated into theCompany’s operations and no longer exist as a discrete business unit.Business-unit goodwill results from purchase business combinations where theacquired operations have been managed as a separate business unit and not fullyabsorbed into the Company. Enterprise-level goodwill is evaluated using themarket-value method, which compares the Company’s net book value to the valueindicated by the market price of the Company’s equity securities. If the netbook value were to exceed the Company’s market capitalization, the excesscarrying amount of goodwill would be written off as an impairment-relatedcharge. Measurement of fair value for business-unit goodwill as well as otherintangibles is based on discounted cash flow analysis at the business-unitlevel.

 

At the adoption of SFAS No.142 on January 1, 2002, the Companydetermined the recorded goodwill to be business-unit level goodwill andaccordingly assessed the fair value of such asset based on discounted cash flowanalysis at the business-unit level, using the Company’s own assumptions.

 

Derivative Instrument and Hedging Activity

 

The Company uses an interest rate swap to convert its variable-rateinterest payments on its mortgage ($5,464,836 at September 30, 2002) tofixed-rate interest payments. This interest rate swap has been designated andqualifies as a cash-flow hedge under SFAS No. 133 (SFAS 133), “Accounting forDerivative Instruments and Hedging Activities.” (“SFAS No. 133”)

 

SFAS No.133 requires the Company to carry all derivative financialinstruments on the balance sheet at fair value.  Changes in fair value of designated, qualified and effective cashflow hedges are estimated and recorded as a component of Other ComprehensiveIncome (Loss) until the hedged transaction occurs, which at that time, isrecognized in earnings(loss).  TheCompany has determined

 

8

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that its interest rate swap was highly effective from the inception ofthe swap in December 2000 through September 30, 2002.

 

The Company did not record the cumulative effect of adopting SFAS No.133 as of January 1, 2001, as the Company considered the impact at adoption tobe immaterial to its financial statements. The Company also did not record the effects of changes in the estimatedfair value of the interest rate swap during 2001 as the Company considered theeffects to be immaterial to its financial statements.  As of  and for the ninemonths ended September 30, 2002, the Company recorded a non-current liabilityof $925,757, which represented the estimated fair value of the interest rateswap, along with an unrealized after-tax loss of $559,064 in OtherComprehensive Loss, which is a component of the Stockholders’ Equity.

 

Reclassifications

 

Certain prior year balances have been reclassified to conform to thecurrent year presentation.

 

**4. Goodwill Impairment**

 

In April 2000, the Company acquired Legend Lithographic, Inc and PseudonCommunications, Inc (collectively “Legend”) to expand the operations in itsDigital Printing segment. As a result of this transaction, the Companyoriginally recorded business – unit level goodwill of approximately $300,000.  During the quarter ended September 30, 2002,as a result of continued unfavorable market conditions, the Company revised itsfinancial forecast for this acquired business unit.  Based on the revised outlook, the Company completed an assessmentof the carrying amount of goodwill for this business unit division. The resultsof the impairment analysis indicated that the carrying amount of goodwill withthis business unit exceeded its estimated fair value based on discounted cashflow.  Accordingly, the Company recordedan impairment charge for the unamortized amount of $258,107.  This charge was recorded within the DigitalPrinting segment and has been included in the impairment charge in theStatements of Operations.

 

 

**5. Comprehensive Income**

 

SFAS No. 130, “Reporting Comprehensive Income”, requires that totalcomprehensive income (loss) be disclosed with equal prominence as net income(loss).   Comprehensive income (loss) isdefined as changes in stockholders’ equity exclusive of transactions withowners, such as capital contributions and dividends.  The Company’s total comprehensive income (loss) is comprised ofnet income (loss) and other comprehensive loss, which consists of changes inthe estimated fair value of the interest rate swap contract.   At September 30, 2002 and 2001, the componentsof comprehensive income (loss) were as follows:

 

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|                         |   | **Three Months Ended  September 30,** |     | **Nine Months Ended  September 30,** |   |
|------------------------------|--------|---------------------------------------|----------|--------------------------------------|--------|
|                         |   | **2002**                              |     | **2001**                             |   | **2002** |   | **2001** |   |
|                         |   | **(Unaudited)**                       |     | **(Unaudited)**                      |   |
| Net (loss) income            |   | $                                     | (619,517 | )                                    | $      | 410,182 |   | $ | 41,932 |   | $ | 1,072,621 |   |
| Other comprehensive  loss:   |   |                                  |     |                                 |   |   |   |   |   |
| Interest rate swap  contract |   | (180,954                              | )        | —                               |   | (559,064 | ) | — |   |
|                         |   |                                  |     |                                 |   |   |   |   |   |
| Comprehensive (loss)  income |   | $                                     | (800,471 | )                                    | $      | 410,182 |   | $ | (517,132 | ) | $ | 1,072,621 |   |

 

 

**6. Earnings (Loss) Per Share**

 

Basic earnings (loss) per share excludes dilution and is computed bydividing the net income (loss) by the weighted-average number of common sharesoutstanding.  Diluted earnings per shareis computed by additionally reflecting the potential dilution that could occur,using the treasury stock method, if options to acquire common stock wereexercised and resulted in the issuance of common stock. Diluted loss per shareexcludes the effect of common stock options because their inclusion would havebeen anti-dilutive.  A reconciliation ofthe weighted-average number of common shares outstanding assuming dilution isas follows:

 
|                                                           |   | **Three Months Ended  September 30** |     | **Nine Months Ended  September 30** |   |
|----------------------------------------------------------------|--------|--------------------------------------|----------|-------------------------------------|--------|
|                                                           |   | **2002**                             |     | **2001**                            |   | **2002** |   | **2001** |   |
|                                                           |   | **(Unaudited)**                      |     | **(Unaudited)**                     |   |
|                                                           |   |                                 |     |                                |   |   |   |   |   |
| Net (loss) income                                              |   | $                                    | (619,517 | )                                   | $      | 410,182 |   | $ | 41,932 |   | $ | 1,072,621 |   |
|                                                           |   |                                 |     |                                |   |   |   |   |   |
| Weighted average common  shares Outstanding                    |   | 5,471,175                            |     | 5,098,886                           |   | 5,364,472 |   | 4,995,379 |   |
| Dilutive effect of  outstanding stockoptions                   |   | —                               |     | 241,902                             |   | 287,275 |   | 103,964 |   |
|                                                           |   |                                 |     |                                |   |   |   |   |   |
| Weighted average common  shares outstanding, assuming dilution |   | 5,471,175                            |     | 5,340,788                           |   | 5,651,747 |   | 5,099,343 |   |
|                                                           |   |                                 |     |                                |   |   |   |   |   |
| Net (loss) income per  share:                                  |   |                                 |     |                                |   |   |   |   |   |
| Basic                                                          |   | $                                    | (0.11    | )                                   | $      | 0.08 |   | $ | 0.01 |   | $ | 0.21 |   |
| Diluted                                                        |   | $                                    | (0.11    | )                                   | $      | 0.08 |   | $ | 0.01 |   | $ | 0.21 |   |

 

For the nine months ended September 30, 2002 and 2001, 246,500 and204,750 options respectively, were excluded from the above reconciliation, asthese options were anti-dilutive for these periods because the exercise priceof these options was greater than the average market price for the reportingperiod.  For the three months endedSeptember 30, 2002 as a result of a net loss, 201,703 stock options wereexcluded from the diluted loss per share calculation, as the shares wereconsidered anti-dilutive.

 

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**7. Segment Information**

 

The Company is organized and operates in three significantsegments:  reprographics, imaging, anddigital printing services.  UntilDecember 31, 2001, the Company also had a facility management services segment.This segment was significantly scaled down during the first quarter of 2002 asmost of the service contracts were terminated by the Company.   At September 30, 2002, the Company has onesuch contract remaining.  Managementdoes not view this division as a separate segment for the nine months endedSeptember 30, 2002.

 

Reprographics involves the copying and management of large amounts ofdocuments extracted in their original format, from the offices and files of ourcustomers. Our reprographic services include copying, binding, drilling,labeling, collating, assembling and quality review.  Our reprographic centers, currently located in Virginia, NewYork, Pennsylvania, Georgia, Illinois, Delaware, and Arizona (through October15, 2002), are open 24 hours a day, seven days a week to handle the promptturn-around time often requested by our customers. A typical job ranges in sizefrom single documents with a small number of pages to multiple sets ofdocuments, which can exceed a million pages. A job is typically picked up byour in-house dispatch service and brought back to our production center. Thejobs are then processed per the customer’s instructions and reviewed by ourquality control staff. Documents are then returned to the client via ourdispatch service. Reprographic jobs are generally billed on a job-by-job basis,based on the number of copies and the level of difficulty in copying theoriginal documents. Each of our reprographic centers are staffed with in-housetechnicians which service our copiers in the event they need repairs.

 

Imaging services involves the conversion or transfer of traditionalpaper and electronic documents into electronic media or vice-versa. Servicesprovided in our Imaging Services Division primarily cater to law firms. Atypical job involves a law firm that is representing a client in a litigationmatter. In order for the law firm to prepare for its case, it often must reviewa large number of documents, emails, and email attachments. As a result, thelaw firms often have a need to search and retrieve appropriate documents in atimely and efficient manner. In order to help meet this need, our ImagingServices Division offers case management consulting, electronic scanning ofdocuments, 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.

 

Digital Printing services include both black and white and colordigital production of catalogs, brochures, postcards, stationary, direct mail,newsletters, and exhibit materials. Our customers  include  organizationsrequiring print media. In addition, we also provide ancillary services, whichinclude graphic design, mailing, special finishing, storage, fulfillment, anddelivery services. Printing jobs are typically billed on a job-by-job basisdepending on several factors, including quantity, number of colors, quality ofpaper, and graphic design time.

 

The Company evaluates its segments’ performance based on revenue andprofit and loss from operations before allocation of corporate administrativeexpenses and income taxes.  A summary ofthe Company’s operating segments is as follows:

 

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|                       |   | **Three Months Ended  September 30** |      | **Nine Months Ended  September 30** |   |
|----------------------------|--------|--------------------------------------|-----------|-------------------------------------|--------|
|                       |   | **2002**                             |      | **2001**                            |   | **2002** |   | **2001** |   |
|                       |   | **(Unaudited)**                      |      | **(Unaudited)**                     |   |
| Revenue                    |   |                                 |      |                                |   |   |   |   |   |
| Reprographics              |   | $                                    | 4,249,316 |                                | $      | 5,938,952 |   | $ | 13,880,331 |   | $ | 17,491,987 |   |
| Imaging                    |   | 3,338,372                            |      | 3,164,805                           |   | 10,729,559 |   | 8,607,253 |   |
| Digital printing           |   | 782,016                              |      | 889,148                             |   | 2,466,801 |   | 2,299,582 |   |
| Facility management        |   | —                               |      | 617,018                             |   | — |   | 1,993,133 |   |
| Other                      |   | 246,661                              |      | —                              |   | 828,629 |   | — |   |
| Inter-segment  elimination |   | (21,366                              | )         | —                              |   | (145,894 | ) | — |   |
|                       |   |                                 |      |                                |   |   |   |   |   |
| Total revenue              |   | $                                    | 8,594,999 |                                | $      | 10,609,923 |   | $ | 27,759,426 |   | $ | 30,391,955 |   |

 
|                               |   | **Three Months Ended  September 30** |     | **Nine Months Ended  September 30** |   |
|------------------------------------|--------|--------------------------------------|----------|-------------------------------------|--------|
|                               |   | **2002**                             |     | **2001**                            |   | **2002** |   | **2001** |   |
|                               |   | **(Unaudited)**                      |     | **(Unaudited)**                     |   |
| (Loss)Income before  taxes:        |   |                                 |     |                                |   |   |   |   |   |
| Reprographics                      |   | $                                    | 264,082  |                                | $      | 1,200,345 |   | $ | 2,172,610 |   | $ | 3,529,248 |   |
| Imaging                            |   | 824,116                              |     | 921,021                             |   | 3,214,525 |   | 2,637,326 |   |
| Digital printing                   |   | (468,120                             | )        | (89,114                             | )      | (553,828 | ) | (563,234 | ) |
| Facility management                |   | —                               |     | 16,664                              |   | — |   | 195,270 |   |
| Other                              |   | 42,005                               |     | —                              |   | 164,878 |   | — |   |
| Corporate  administrative expenses |   | (1,622,596                           | )        | (1,358,159                          | )      | (4,944,318 | ) | (3,901,315 | ) |
|                               |   |                                 |     |                                |   |   |   |   |   |
| Total (loss) income  before taxes  |   | $                                    | (960,513 | )                                   | $      | 690,757 |   | $ | 53,867 |   | $ | 1,897,295 |   |

 

**8. Line of Credit**

 

The Company has available a $7,000,000 working capital line of creditas of September 30, 2002.   The line ofcredit is subject to certain financial covenants the Company must meet eachquarter.  Per the terms of theagreement, the Company is required to maintain an Interest Coverage Ratio, asdefined, in excess of 2.0:1.  For thethree months ended September 30, 2002, the Company’s Interest Coverage Ratiowas 1.77:1 and thus was not in compliance with this covenant.  The Company has received a waiver on thiscovenant from the bank through December 31, 2002.  The Company met all other financial covenants for the threemonths ended September 30, 2002 and, at this time, expects to remain incompliance with all of the covenants within the next twelve months. In theevent that the Company is not in compliance with debt covenants, the bank hasthe right to call for immediate payments on some or all debt borrowings coveredunder the debt agreements (approximately $12 million). If such an event were tooccur, the company may be forced to seek alternative sources of funding.  The Company does not believe such event islikely to occur.

 

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**Item 2.  Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

On-Site Sourcing, Inc. (On-Site, the Company, we, us, or our) providesdocument and information management services through its facilities in thegreater Atlanta, Baltimore, New York City, Philadelphia, Washington, D.C.,Chicago, and Wilmington metropolitan areas, and served clients on the WestCoast through its Tempe, Arizona facility (through October 15, 2002).  We help clients in information-intensiveindustries manage large volumes of documents and information, allowing them toconcentrate on their core business operations. Our target clients typicallygenerate large volumes of documents and information that require specializedprocessing, distribution, storage, and retrieval.  Our typical clients include law firms, insurance companies,healthcare organizations, non-profit organizations, accounting, consulting andfinance firms and other organizations throughout the East Coast of the UnitedStates.  We plan to leverage ourrelationships with the existing top 100 law firms to build a solid base oflegal revenues in the Chicago market. The Wilmington office will serve as a small production center to servicekey accounts in the area with a faster, more efficient turn-around time.  Both offices will focus on imaging,electronic file processing, and legal copy services.  We also provide commercial printing services utilizing digitalprinting technology in our facilities in the Washington, D.C. area.  As noted in Footnote 1 to the financialstatements, effective October 15, 2002, the Company ceased production at itsfacility in Tempe, Arizona as result of a strategic decision to focus on largergeographic markets for growth, and to minimize current losses. The productionfacility represented a component of the Imaging Services Segment.

 

On–Site was originally incorporated in Virginia in December 1992,and changed its state of incorporation to Delaware in March 1996.

 

**Forward Looking Disclosure**

 

Certain information included herein contains forward-looking statementswithin the meaning of the Private Securities Litigation Reform Act of1995.  All statements other than statementsof historical fact, including statements regarding industry prospects, plansfor future expansion and other business development activities as well asfuture results of operations or financial position and the effects ofcompetition are forward looking.  Suchforward-looking information is subject to changes and variations which are notreasonably predictable and which could significantly affect futureresults.  Accordingly, such results maydiffer from those expressed in any forward-looking statements made by or onbehalf of the Company.  The risks anduncertainties that could significantly affect future results include, but arenot limited to, those relating to the adequacy of operating and managementcontrols, operating in a competitive environment and a changing environment,including new technology and processes, existing and future vendorrelationships, the Company’s ability to access capital and meet its debtservice requirements, dependence on existing management, general economic conditions,terrorist attacks, and changes in federal or state laws or regulations.  These risks and uncertainties, along withthe following discussion, describe some, but not all, of the factors that couldcause actual results to differ significantly from management’s expectations.

 

**Critical Accounting Policies andJudgments**

 

The preparation of 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.  The U.S. Securities and Exchange Commissionhas defined a company’s most critical accounting policies as the ones that aremost important to the portrayal of the Company’s financial condition andresults of operations, and which require the Company to make its most difficultand subjective judgments, often as a result of the need to make estimates ofmatters that are inherently uncertain. Based on this definition, we have

 

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identified the critical accounting policies and judgments addressedbelow.  Although we believe that ourestimates and assumptions are reasonable, they are based upon informationpresently available.  Actual results maydiffer significantly from these estimates under different assumptions orconditions.

 

**Revenue Recognition**

 

Revenue is primarily derived from providing imaging, reprographics anddigital printing services.   The Companyrecognizes revenue from services rendered when the following four revenuerecognition criteria are met: persuasive evidence of an arrangement exists, serviceshave been 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.

 

For services that are completed but not delivered to the customers, norevenue is recognized and the associated costs, estimated based on average unitcosts, are inventoried accordingly. Such costs are included in results of operation during the same periodwhen the related services are delivered and the revenue is recognized.

 

The Company also derives revenue from facility managementservices.    Revenue on facilitymanagement services is recognized on a monthly basis over the contract term(typically one year) as services are performed.

 

Included in “Accounts receivable, net” on our Balance Sheets is anallowance for doubtful accounts. Generally, before we do business with a new client, we have a creditcheck performed on that company to determine if they have a satisfactory creditrating.  Senior management reviews theaccounts receivable aging on a monthly basis to determine if any receivableswill potentially be uncollectable. After all attempts to collect the receivable have failed, the receivableis written off against the allowance. Based on the information available to us, we believe our allowance fordoubtful accounts as of September 30, 2002 is adequate.  However, no assurances can be given thatactual write-offs will not exceed the recorded allowance.

 

**Accounting for Goodwill**

 

Goodwill represents the excess of the purchase price over the fairvalue of net assets acquired in business acquisitions accounted for under thepurchase accounting method.  EffectiveJanuary 1, 2002, the Company adopted the full provisions of SFAS No. 142,“Goodwill and Other Intangible Assets.” SFAS No. 142 requires that goodwill and certain indefinite-livedintangibles no longer be amortized, but instead be tested for impairment atleast annually.  SFAS No. 142 prescribesa two-phase process for impairment testing of goodwill.  The first phase evaluates goodwill forimpairment; while the second phase (if necessary), measures the impairment.

 

In accordance with SFAS No.142, the Company records impairment losseson goodwill when events and circumstances indicate that such assets might beimpaired and the estimated fair value of the asset is less than its recordedamount. Conditions that would necessitate an impairment assessment includematerial adverse changes in operations, significant adverse differences inactual results in comparison with initial valuation forecasts prepared at thetime of acquisition, a decision to abandon acquired products, services ortechnologies, or other significant adverse changes that would indicate thecarrying amount of the recorded asset might not be recoverable.

 

Under SFAS No. 142, goodwill is viewed in two separate categories:enterprise-level and business-unit level. Enterprise-level goodwill resultsfrom acquisitions of businesses that have been fully

 

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integrated into the Company’s operations and no longer exist as adiscrete business unit. Business-unit goodwill results from purchase businesscombinations where the acquired operations have been managed as a separatebusiness unit and not fully absorbed into the Company. Enterprise-levelgoodwill is evaluated using the market-value method, which compares theCompany’s net book value to the value indicated by the market price of theCompany’s equity securities. If the net book value were to exceed the Company’smarket capitalization, the excess carrying amount of goodwill would be writtenoff as an impairment-related charge. Measurement of fair value forbusiness-unit goodwill as well as other intangibles is based on discounted cashflow analysis at the business-unit level.

 

At the adoption of SFAS No.142 on January 1, 2002, the Companydetermined the recorded goodwill to be business-unit level goodwill andaccordingly assessed the fair value of such asset based on discounted cash flowanalysis at the business-unit level, using the Company’s own assumptions.

 

As noted in Footnote 4 to the financials statements, during the quarterended September 30, 2002, as a result of continued unfavorable marketconditions, the Company revised its financial forecast for a business unit inthe Digital Printing segment.  Based onthe revised outlook, the Company performed an assessment of the carrying amountof goodwill for this business unit. The results of the impairment analysisindicated that the carrying amount of goodwill with this division exceeded itsestimated fair value.  Accordingly, theCompany recorded an impairment charge for 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.

 

**Accounting for Derivative Instrumentand Hedging Activity**

 

The Company uses an interest rate swap to convert its variable-rateinterest payments on its mortgage ($5,464,836 at September 30, 2002) tofixed-rate interest payments. This interest rate swap has been designated andqualifies as a cash-flow hedge under SFAS No. 133 (“SFAS No. 133”), “Accountingfor Derivative Instruments and Hedging Activities.”

 

SFAS No.133 requires the Company to carry all derivative financialinstruments on the balance sheet at fair value.  Changes in fair value of designated, qualified and effective cashflow hedges are deferred and recorded as a component of Other ComprehensiveIncome (Loss) until the hedged transaction occurs, which at that time isrecognized in earnings(loss).  TheCompany has determined that its interest rate swap was highly effective fromthe inception of the swap in December 2000 through September 30, 2002.

 

The Company did not record the cumulative effect of adopting SFAS No.133 as of January 1, 2001, as the Company considered the impact at adoption tobe immaterial to its financial statements. The Company also did not record the effects of changes in the estimatedfair value of the interest rate swap during 2001 as the Company considered theeffects to be immaterial to its financial statements.  As of and for the nine months ended September 30, 2002, theCompany recorded a non-current liability of $925,757, which represented theestimated fair value of the interest rate swap along with an unrealizedafter-tax loss of $559,064 in Other Comprehensive Loss, which is a component ofStockholders’ Equity.

 

**Long-lived Assets**

 

Long-lived assets (primarily property and equipment of the Company) arereviewed for impairment whenever events or changes in circumstances indicatethe carrying amount of the assets might not be recoverable. Note that goodwilland other indefinite-lived intangible assets are not included in this

 

15

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definition of “long-lived assets”, but rather are accounted for under adifferent standard, SFAS No. 142, as noted above. The Company does not performa periodic assessment of assets for impairment in the absence of suchinformation or indicators. Conditions that would necessitate an impairmentassessment include a significant decline in the observable market value of anasset, a significant change in the extent or manner in which an asset is used,or a significant adverse change that would indicate that the carrying amount ofan asset or group of assets is not recoverable. For long-lived assets to beheld and used, the Company measures fair value based on quoted market prices,discounted estimates of future cash flows or other methods. For the nine monthsended September 30, 2002, the Company did not note any events or changes incircumstances indicating the carrying amount of long-lived assets were notrecoverable.

 

**Accounting for 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 recovered. The Company providesa valuation allowance for deferred tax assets for amounts it considersunrealizable.  As of September 30, 2002,the Company did not provide any valuation allowance for the deferred taxassets.  This assessment is based onmanagement’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.  Although the ultimate outcome of thesematters is currently not determinable, 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.

 

**RESULTS OF OPERATIONS**

 

**Three and Nine Months Ended September30, 2002 Compared with Three and Nine Months Ended September 30, 2001**

 

**REVENUE**

 

Revenue for the three months ended September 30, 2002 decreased by$2,014,924, to $8,594,999 from $10,609,923 in the comparable period in2001.  Revenue for the nine months endedSeptember 30, 2002 decreased by $2,632,529 to $27,759,426 from $30,391,955 inthe comparable period in 2001.

 

As compared to the comparable periods for 2001, revenues in theCompany’s Reprographic division for the three and nine months ended September30, 2002, decreased $1,689,636 and $3,611,656, respectively.  This decrease was partially offset by anincrease in revenue from the Company’s Imaging division of $173,567 and$2,122,306, as compared to the three and nine months ended September 30, 2001.Revenues were negatively affected by approximately $370,357 and $1,164,504, forthe three and nine months ended September 30, 2002, respectively, as a resultof the Company terminating several facilities management contracts during thefirst quarter of 2002.

 

16

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The Company generates a large percentage of its revenue from law firms,which typically engage in large transactional matters involving businesscombinations. As a result of a weak economy, which in turn resulted in asignificantly lower level of merger and acquisition activities, the Companyexperienced a lower than expected amount of revenue in its reprographic andimaging divisions.  The Company, inorder to lessen its dependence on law firms, is actively pursuing other sourcesof revenue, including other market segments such as government, healthcare,insurance and Fortune 1000 organizations.

 

Revenue by reporting segment is included in the Notes to FinancialsStatements in this quarterly report on Form 10Q.

 

**COST OF SALES**

 

Cost of sales includes expenses related to compensation and benefits toemployees, occupancy costs, equipment costs including depreciation, supplies,and other costs, which are directly related to providing goods and services toour clients. As a percentage of revenue, cost of sales for the three monthsended September 30, 2002, as compared to the comparable period in 2001,increased from approximately 65.6% to approximately 68.4%.  The increase was primarily due to productionrelated efficiencies the Company was not able to achieve as a result of asignificant decrease in revenues. In addition to costs associated with openinga new Chicago, Illinois office, other factors, which negatively affected costof sales, included losses experienced in both the Company’s Arizona office andthe Company’s Digital Printing Division.

 

As a percentage of revenue, cost of sales for the nine months endedSeptember 30, 2002, as compared to the comparable period in 2001, decreasedfrom approximately 65.7% to approximately 61.6%.  The decrease is primarily attributable to the Companyexperiencing lower levels of cost of sales in its Imaging Services division,due to the implementation of internally developed software applications thatautomatically format and print emails, attachments, and other file types.  These applications continue to be improvedand have enabled the Company to replace certain labor-intensive processes withfaster and more efficient automated processing.

 

 

**SALES AND MARKETING EXPENSES**

 

Sales and marketingexpenses for the three months ended September 30, 2002, as a percentage ofrevenue, increased to approximately 13.6% from approximately 9.9% in thecomparable period in 2001.  For the ninemonths ended September 30, 2002, sales and marketing expense, as a percentageof revenue, increased to approximately 12.8% from approximately 9.4% in thecomparable period in 2001.  Sales andmarketing expense primarily consists of sales commissions, salaries and relatedcosts, travel and entertainment, and other costs related to our salesstaff.  Selling expense fluctuates withthe number of  “house” account sales, onwhich no commissions are paid, and “commissioned” accounts on which salescommissions are paid.  In addition to hiring14 new account executives and three national sales representatives since January1, 2002, the Company experienced higher commission expense for the three andnine months ended September 30, 2002 as a result of a greater number ofcommissioned accounts compared to house accounts, for the three and nine monthsended September 30, 2001. As of August 2002, the company terminated itsnational account program. As a result, three national account executives werereleased from the Company’s employment. For the nine months ended September 2002 the Company incurred costs ofapproximately $100,000 related to the cessation of the National AccountProgram.

 

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**GENERAL AND ADMINISTRATIVE EXPENSES**

 

General and administrative expense for the three months ended September30, 2002 was $2,026,176 compared to $1,522,702 in the comparable period in2001, an increase of approximately $503,500. General and administrative expense for the nine months ended September30, 2002 was $6,187,748 compared to $4,596,138 in the comparable period in2001, an increase of approximately $1,591,600.

 

Significant factors that contributed to the increased expense for thethree and nine months ended September 30, 2002 include the following:

 

Approximately $348,500 and $649,500 of the increasefor the three and nine months ended September 30, 2002 respectively, comparedto the three and nine months ended September 30, 2001, is due to higheradministrative salaries as a result of hiring several employees in theCompany’s executive, human resources, accounting, and information technologydepartments.

 

Approximately $43,100 and $170,100 of the increase forthe three and nine months ended September 30, 2002 respectively, compared tothe three and nine months ended September 30, 2002 is due to increased travelbetween cities by executive and management level employees to monitor andimprove the operations of the various production facilities.

 

Approximately $79,900 and $255,000 of the increase forthe three and nine months ended September 30, 2002 respectively, compared tothe three and nine months ended September 30, 2001 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.

 

Approximately $74,800 and $317,200 of the increase forthe three and nine months ended September 30, 2002 respectively, compared tothe three and nine months ended September 30, 2001 is related to variousincreased office expenses and outside services.

 

Office expenses include costs incurred to move theCompany’s corporate headquarters and Virginia production center to its newlocation in Alexandria, Virginia, and costs incurred to maintain and makeimprovements to the new location. Included in professional & outside services are costs related toplacement fees for management level employees, auditor fees, and outside legalcounsel fees.

 

 

**IMPAIRMENT OF GOODWILL**

 

As noted previously, the Company recorded an impairment charge for thefull carrying value of goodwill in a business unit in the amount of $258,107,during the quarter ended September 30, 2002.

 

**OTHER INCOME AND EXPENSE**

 

Other income for the three months ended September 30, 2002 wasapproximately $15,500 compared to approximately $82,800 in the comparable periodin 2001, a decrease of approximately $67,300. Other income for the nine months ended September 30, 2002 wasapproximately $73,100 compared to approximately $235,500 in the comparableperiod in 2001, a decrease of approximately $162,400.  The higher income in the three and nine month periods in 2001 wasattributable to rental income generated from subletting portions of thebuilding purchased by the Company in Alexandria, VA.  During the three and nine month periods in 2002, as a result ofoccupying the property for its corporate headquarters and Virginia productioncenter in January of 2002, the Company did not

 

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recognize significant amounts of rental income, which was previouslyderived from subletting certain portions of the property. The Company currentlyhas one tenant whose lease expires in January of 2003.

 

Interest expense for the three months ended September 30, 2002 totaledapproximately $202,200 compared to approximately $307,200 for the comparableperiod in 2001, a decrease of approximately $105,000.  Interest expensefor the nine months ended September 30, 2002 totaled approximately $631,500compared to approximately $971,600 for the comparable period in 2001, adecrease of approximately $340,100.  Thedecrease is due to reduced overall market rates of interest related toborrowings under credit agreements and certain other current debt arrangements,lower utilization of the Company’s line of credit, and the expiration offinancing arrangements for equipment and vehicles. The Company’s line of creditbalance as of September 30, 2002 was $3,882,165 compared to $6,239,277 as ofSeptember 30, 2001.

 

Other expense for the three months ended September 30, 2002 decreasedby approximately $118,800 to approximately $35,500 from approximately $154,300in the comparable period in 2001.  Other expense for the nine months endedSeptember 30, 2002 decreased by approximately $267,100 to approximately $61,200from approximately $328,300 in the comparable period in 2001.  Other expense includes losses incurred as aresult of disposal of certain non-performing assets for the nine months endedSeptember 30, 2002 and, in the comparable period in 2001, included expenses relatedto the maintenance of the Alexandria, VA property, which is now used as theCompany’s headquarters.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

We have funded our expansion by utilizing internally generated cashflow, long term financing, and a commercial line of credit.  We anticipatethe cash flow from operations and credit facilities will be sufficient to meetthe expected cash requirements for the next twelve months. There can be noassurances that unforeseen events may not require more working capital than wehave at our disposal.

 

In order to assure additional working capital is available to fund ouroperations, we had available a $7,000,000 working capital line of credit as ofSeptember 30, 2002. The line of credit is subject to eligible accountsreceivable.  The Company has the capacity to borrow, at any given time,the lesser of the established line of credit or eligible accounts receivable,generally defined as 75% of accounts receivable that are less than 120 daysold.  The working capital line of credit bears interest at the lesser of thebank’s prime rate of interest or the 30-day LIBOR rate plus 2.20%. The line ofcredit, which expires May 31, 2003, is subject to certain financial covenants;the most significant requires the Company to maintain a minimum Net TangibleWorth, as defined in the related debt agreements, of $6,000,000.  AtSeptember 30, 2002 total borrowings of $3,882,165 were outstanding under the agreement.  The Net TangibleWorth as of September 30, 2002 was $9,060,462.

 

Per the terms of the agreement, the Company is also required tomaintain an Interest Coverage Ratio, as defined, in excess of 2.0:1.  For the three months ended September 30,2002, the Company’s Interest Coverage Ratio was 1.77:1 and thus was not incompliance with this covenant.  TheCompany has received a waiver on this covenant from the bank through December31, 2002.  The Company met all otherfinancial covenants for the three months ended September 30, 2002 and at thistime, expects to remain in compliance with all of the covenants within the nexttwelve months. In the event that the Company is not in compliance with debtcovenants, the bank has the right to call for immediate payments on some or alldebt borrowings covered under the debt agreements. If such an event were tooccur, the company may be forced to seek alternative sources of funding.  The Company does not believe such an eventis likely to occur.

 

19

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In November 2000, the Company entered into a mortgage note payable inthe amount of $5,800,000 with First Union – Wachovia Bank.  The mortgage was to fund the purchase of theAlexandria, Virginia property.  Underthe terms of the note and interest rate swap agreements discussed earlier, theCompany is required to make monthly principal and interest payments in theaggregate of $60,495 for a period of seven years.  When the note becomes due in October 2007, the Company isrequired to make a lump-sum payment of $4,155,254.  In order to manage interest costs and exposure to changinginterest rates, the Company entered into an interest rate swap agreement inwhich the interest rate is fixed at 9.48%. The fair value of the interest rate hedge is reflected in accumulatedother comprehensive income, net of tax, as discussed earlier.

 

In September 2002, the Company entered into a note payable in theamount of $1,250,000 with First Union – Wachovia Bank.  The note was obtained to create additionalborrowing capacity under the line of credit agreement.  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 rate plus 2.50%.

 

In addition, we have obtained financing for certain equipment in theaggregate amount of approximately $2,500,000 as of September 30, 2002.  The notes are secured by the equipment and accrue interest at rates rangingfrom 4.34% to 10.25% per year and mature at various times between 2002 and 2008.

 

For its short-term liquidity, the Company relies on its line of credit,the availability of which depends on the Company’s accounts receivable balancesand cash flows from operations.  TheCompany may experience an inability to meet its capital requirements if any oneor a combination of the following occur: significant losses from operations,significant decrease in revenues, default of certain line of credit covenants,such as the requirement that the Company must maintain a minimum net worth,causing the line of credit to be due on demand, or the default by customers, ora group of customers, with significant accounts receivable balances owed to theCompany.

 

In order to meet its capital requirements, the Company may seekadditional sources of financing.  Thesemay include collateral-based loans, capital leases and operating leases.

 

The following summarizes, as of September 30, 2002, our obligations andcommitments to make future payments (principal and interest) under contracts,such as debt and lease arrangements, and under contingent commitments, such asdebt guarantees.  We expect to fund suchobligations from cash generated from operations activities and funding from ourline of credit.

 

20

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|                                            |   | **Payments Due by Period** |       |
|-------------------------------------------------|--------|----------------------------|------------|
| **Contractual Obligations**                     |   | **Total**                  |       | **Less than  1 Year** |   | **1-3****Years** |   | **4-5  Years** |   | **After 5  Years** |   |
| Line of Credit                                  |   | $                          | 3,882,165  |   | $ | 3,882,165 |   | $ | — |   | $ | — |   | $ | — |   |
| Building Mortgage                               |   | 7,845,450                  |       | 725,940 |   | 1,451,880 |   | 1,451,880 |   | 4,215,750 |   |
| Long-Term Debt                                  |   | 3,127,147                  |       | 1,137,485 |   | 1,652,657 |   | 337,005 |   |   |   |
| Capital Lease Obligations                       |   | 174,078                    |       | 134,128 |   | 39,950 |   |   |   |   |   |
| Operating Lease, Rental & Lease Commitments |   | 6,682,901                  |       | 1,988,152 |   | 2,786,136 |   | 1,408,225 |   | 500,388 |   |
| Total Contractual Cash Obligations              |   | $                          | 21,711,741 |   | $ | 7,867,870 |   | $ | 5,930,623 |   | $ | 3,197,110 |   | $ | 4,716,138 |   |

 

**Recent Accounting Pronouncements**

 

In July 2001, the FASB issued SFAS No. 141, “Business Combinations” andSFAS No. 142, “Goodwill and Other Intangible Assets.”   SFAS No. 141 requires business combinations initiated after June30, 2001 be accounted for using the purchase method of accounting, and broadensthe criteria for recording intangible assets separate from goodwill.  Recorded goodwill and intangibles will beevaluated against these new criteria and may result in certain intangiblesbeing reclassified into goodwill, or alternatively, amounts initially recordedas goodwill may be separately identified and recognized apart from goodwill.SFAS No. 142 requires the use of a non-amortization approach to account forpurchased goodwill and certain intangibles. Under a non-amortization approach, goodwill and certain intangibles willnot be amortized into results of operations, but instead would be reviewed forimpairment and written down and charged to results of operations only in theperiods in which the recorded value of goodwill and certain intangibles is morethan its fair value.  The provisions ofthe two statements that apply to goodwill were adopted by the Company onJanuary 1, 2002. The adoption of the standards on January 1, 2002 did not havea material impact on the Company’s financial statements.

 

The FASB also recently issued SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” that is applicable to financialstatements issued for fiscal years beginning after December 15, 2001. TheFASB’s new rules on asset impairment supersede SFAS No. 121, “Accounting forthe Impairment of Long-Lived Assets and for Long-Lived Assets to Be DisposedOf,” and portions of Accounting Principles Bulletin Opinion No. 30, “Reportingthe Results of Operations.” This Standard provides a single accounting modelfor long-lived assets to be disposed of and significantly changes the criteriathat would have to be met to classify an asset as held-for-sale. Classificationas held-for-sale is an important distinction since such assets are notdepreciated and are stated at the lower of fair value and carrying amount. ThisStandard also requires expected future operating losses from discontinuedoperations to be displayed in the period(s) in which the losses are incurred,rather than as of the measurement date as presently required. The adoption ofthis Standard at January 1, 2002 did not have a material effect on theCompany’s financial statements.

 

In August 2002, the FASB issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities”. 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 cost associatedwith an exit or disposal activity be recognized when the liability is incurredand establishes that fair value is the objective for initial measurement of theliability.  Under EITF Issue No. 94-3, aliability for an exit cost is

 

21

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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, with earlyadoption encouraged.  The Company doesnot believe that SFAS No. 146 will have a material effect on the Company’sfinancial position or results of operations.

 

 

**Item 3.Quantitative and Qualitative Disclosures about Market Risk**

 

We believe our primary market risk exposure with regard to our financialinstruments is limited to changes in interest rates. Based upon the compositionof our variable rate debt outstanding at September 30, 2002, we do not believethat a hypothetical increase in the bank’s prime rate of interest or the 30-dayLIBOR rate would be material to net income.

 

The Company’s activities expose it to market risks that are related tothe effects of changes in interest rates. This financial exposure is monitored and managed by the Company as anintegral part of its overall risk management program.  The Company’s risk-management program focuses on theunpredictability of interests rates and seeks to reduce the potentially adverseeffects that the volatility of these rates may have on its future cashflows.  The Company maintains aninterest rate risk management strategy that uses a derivative instrument tominimize significant, unanticipated earnings fluctuations that may arise fromvolatility in interest rates.

 

By using a derivative financial instrument to hedge exposures to changesin interest rates, the Company exposes itself to credit risk and marketrisk.  Credit risk is the risk that thecounterparty might fail to fulfill its performance obligations under the termsof the derivative contract.  When thefair value of a derivative contract is positive, the counterparty owes theCompany, which creates repayment risk for the Company.  When the fair value of a derivative contractis negative, the Company owes the counterparty and, therefore, does not assumerepayment risk.  The Company minimizesits credit (or repayment) risk in derivative instruments by 1) entering intotransactions with a high-quality counterparty and 2) monitoring the financialcondition of its counterparty.  Marketrisk is the risk that the value of a financial instrument might be adverselyaffected by a change in interest rates. The Company manages the market risk associated with interest ratecontracts by establishing and monitoring parameters that limit the types and degreeof market risk that may be undertaken.

 

**Item 4. Controls and Procedures**

 

Based on an evaluation of the Company’s disclosure controls andprocedures as of a date within 90 days of the filing date of this quarterlyreport, each of the chief executive officer and the chief financial officer of theCompany has concluded that the Company’s disclosure controls and procedures areeffective in connection with the Company’s filing of this quarterly report onForm 10-Q for the period ended September 30, 2002.

 

There were no significant changes in the Company’s internal controls orin any other factors which could significantly affect those controls subsequentto the date of the most recent evaluation of the Company’s internal controls bythe Company, including any corrective actions with regard to any significantdeficiencies or material weaknesses.

 

22

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**Part II.  OtherInformation**

 
| **Item  1.** | **Legal Proceedings**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|         | None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **Item  2.** | **Changes  in Securities and Use of Proceeds**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|         | None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **Item  3.** | **Defaults  Upon Senior Securities**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|         | None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **Item  4.** | **Submission  of Matters to a Vote of Security Holders**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|         | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **Item  5.** | **Other Information**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|         | On October 15, 2002, the Company ceased production  at its facility in Tempe, Arizona, as a result of a strategic decision to  focus on larger geographic markets for growth, and to minimize current  losses.  The equipment from this  facility will be distributed to the Company’s other facilities.  The lease for the Arizona facility expires  in August 2003. The Company plans to sublease the facility until the lease  expires.  The Company does not expect  the costs of moving the equipment or losses from the subleasing arrangement,  if any, to be material. |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **Item  6.** | **Exhibits and Reports**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (A)          | EXHIBITS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|         | Exhibit 10.23 Certication  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|         | Exhibit  10.24 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|         | Exhibit 10.25 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.                                                                                                                                                                                                                                                                                                                                                                                                     |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|         | Exhibit 10.26 $1,250,000  Term Note Agreement. Dated September 25, 2002 with Wachovia Bank.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (B)          | REPORTS ON FORM 8-K                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| None    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |

 

23

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**SIGNATURE**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|              |   | ON-SITE SOURCING, INC.                                     |
|-------------------|--------|------------------------------------------------------------|
|              |   | (Registrant)                                               |
|              |   |                                                       |
|              |   |                                                       |
|              |   |                                                       |
| November 14, 2002 |   | /s/  Jason  Parikh                                    |
| Date              |   | Jason Parikh

Chief Financial Officer                      |
|              |   | (Duly Authorized Officer and Principal Financial  Officer) |

 

24

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**CERTIFICATIONS**

 

I, Christopher Weiler, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of On-SiteSourcing, Inc.;

 

2. Based on my knowledge, this quarterly report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisquarterly report;

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controlsand procedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5. The registrant’s other certifying officers and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

 

a) all significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrant’s ability to record,process, summarize and report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management or otheremployees who have a significant role in the registrant’s internal controls;and

 

6. The registrant’s other certifying officers and I have indicated inthis quarterly report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 
| /s/ Christopher Weiler |   |
|-----------------------------|--------|
|                        |
|                        |
| Christopher Weiler          |
| Chief Executive Officer     |
| November14, 2002            |

 

25

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**CERTIFICATIONS**

 

I, Jason Parikh, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of On-SiteSourcing, Inc.;

 

2. Based on my knowledge, this quarterly report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisquarterly report;

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controlsand procedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5. The registrant’s other certifying officers and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

 

a) all significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrant’s ability to record,process, summarize and report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management orother employees who have a significant role in the registrant’s internalcontrols; and

 

6. The registrant’s other certifying officers and I have indicated inthis quarterly report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 
| /s/ Jason Parikh   |   |
|-------------------------|--------|
|                    |
| Jason Parikh            |
| Chief Financial Officer |
| November14, 2002        |

 

26

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