**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended March 31, 2003**

 

**Commission File No. 0-20947**

 

**ON-SITE SOURCING, INC.**

(Exactname of registrant as specified in its charter)

 

| **DELAWARE**                                                                        |   | **54 -  1648470**                             |
|-------------------------------------------------------------------------------------|--------|-----------------------------------------------|
| (State or other  jurisdiction of  Incorporation or organization)                    |   | (I.R.S.  Employer Identification 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 checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes ý  No o.

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of May 12, 2003:

 

| Common Stock, $.01 par  value |   | 5,494,225 shares |
|-------------------------------|--------|------------------|

 

 

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ON-SITE SOURCING,INC.

INDEX

 
| **Part  I.** | **Financial  Information**                                                                                      |
|--------------|-----------------------------------------------------------------------------------------------------------------|
|         |                                                                                                            |
| Item 1.      | Financial Statements:                                                                                           |
|         | Balance Sheets as of March 31, 2003  (unaudited) and  December 31, 2002                                         |
|         |                                                                                                            |
|         | Statements of Operations for  the Three Months Ended  March 31, 2003 (unaudited) and 2002 (unaudited)           |
|         |                                                                                                            |
|         | Condensed Statements  of Cash Flows for the Three Months  Ended March 31, 2003 (unaudited) and 2002 (unaudited) |
|         |                                                                                                            |
|         | Notes to Financial  Statements                                                                                  |
|         |                                                                                                            |
| 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

 
|                                                                                                                                                      |   | **March 31,  2003** |       | **December 31,  2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|------------------------|--------|
|                                                                                                                                                      |   | **(Unaudited)**     |       |                   |   |
| ASSETS                                                                                                                                                    |   |                |       |                   |   |
|                                                                                                                                                      |   |                |       |                   |   |
| CURRENT ASSETS:                                                                                                                                           |   |                |       |                   |   |
| Cash                                                                                                                                                      |   | $                   | 4,279      |                   | $      | 4,279 |   |
| Accounts receivable, net                                                                                                                                  |   | 8,466,078           |       | 8,157,822              |   |
| Prepaid supplies                                                                                                                                          |   | 466,069             |       | 503,693                |   |
| Prepaid expenses                                                                                                                                          |   | 341,497             |       | 288,469                |   |
| Income taxes refundable                                                                                                                                   |   | 419,815             |       | —                 |   |
| Deferred tax asset                                                                                                                                        |   | 104,608             |       | 104,608                |   |
| Notes receivable                                                                                                                                          |   | 42,240              |       | 48,442                 |   |
| Total current assets                                                                                                                                      |   | 9,844,586           |       | 9,107,313              |   |
|                                                                                                                                                      |   |                |       |                   |   |
| Property and equipment, net                                                                                                                               |   | 14,323,372          |       | 14,894,103             |   |
|                                                                                                                                                      |   |                |       |                   |   |
| OTHER ASSETS                                                                                                                                              |   |                |       |                   |   |
| Goodwill                                                                                                                                                  |   | 648,443             |       | 648,443                |   |
| Income taxes refundable                                                                                                                                   |   | 191,553             |       | 606,134                |   |
| Other assets                                                                                                                                              |   | 139,681             |       | 152,767                |   |
| Total assets                                                                                                                                              |   | $                   | 25,147,635 |                   | $      | 25,408,760 |   |
|                                                                                                                                                      |   |                |       |                   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                 |   |                |       |                   |   |
|                                                                                                                                                      |   |                |       |                   |   |
| CURRENT LIABILITIES:                                                                                                                                      |   |                |       |                   |   |
| Line of credit                                                                                                                                            |   | $                   | 3,500,352  |                   | $      | 2,861,414 |   |
| Current portion of long-term debt                                                                                                                         |   | 1,082,432           |       | 1,101,706              |   |
| Accounts payable                                                                                                                                          |   | 1,434,976           |       | 1,987,302              |   |
| Accrued and other liabilities                                                                                                                             |   | 1,269,478           |       | 1,238,028              |   |
| Total current liabilities                                                                                                                                 |   | 7,287,238           |       | 7,188,450              |   |
|                                                                                                                                                      |   |                |       |                   |   |
| NONCURRENT LIABILITIES                                                                                                                                    |   |                |       |                   |   |
| Long-term debt, net of current portion                                                                                                                    |   | 6,635,913           |       | 6,897,100              |   |
| Deferred rent                                                                                                                                             |   | 259,125             |       | 257,747                |   |
| Deferred tax liability                                                                                                                                    |   | 228,458             |       | 266,846                |   |
| Interest rate swap contract liability                                                                                                                     |   | 893,210             |       | 913,306                |   |
| Total liabilities                                                                                                                                         |   | 15,303,944          |       | 15,523,449             |   |
|                                                                                                                                                      |   |                |       |                   |   |
| Commitments and contingencies                                                                                                                             |   |                |       |                   |   |
|                                                                                                                                                      |   |                |       |                   |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                                |   |                |       |                   |   |
| Common stock, $0.01 par value, 20,000,000 shares  authorized 5,607,815 and 5,589,240 shares issued and 5,494,225 and 5,475,650  outstanding, respectively |   | 56,078              |       | 55,892                 |   |
| Additional paid-in capital                                                                                                                                |   | 7,909,210           |       | 7,882,313              |   |
| Other comprehensive loss                                                                                                                                  |   | (539,409            | )          | (551,545               | )      |
| Treasury stock (113,590 shares of common stock at  cost)                                                                                                  |   | (396,152            | )          | (396,152               | )      |
| Retained earnings                                                                                                                                         |   | 2,813,964           |       | 2,894,803              |   |
| Total stockholders’ equity                                                                                                                           |   | 9,843,691           |       | 9,885,311              |   |
| Total liabilities and stockholders’ equity                                                                                                           |   | $                   | 25,147,635 |                   | $      | 25,408,760 |   |

 

The accompanying notesare an integral part of these financial statements.

 

3

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ON-SITE SOURCING, INC.

STATEMENTS OF OPERATIONS

 
|                                 |   | **(Unaudited)  Three Months Ended** |      |
|--------------------------------------|--------|-------------------------------------|-----------|
|                                 |   | **March 31,  2003**                 |      | **March 31,  2002** |   |
|                                 |   |                                |      |   |   |
| Revenue                              |   | $                                   | 8,836,068 |   | $ | 8,850,235 |   |
|                                 |   |                                |      |   |   |
| Costs and expenses:                  |   |                                |      |   |   |
| Cost of sales                        |   | 6,027,205                           |      | 5,528,859 |   |
|                                 |   | 2,808,863                           |      | 3,321,376 |   |
|                                 |   |                                |      |   |   |
| Sales and marketing                  |   | 1,074,992                           |      | 1,059,805 |   |
| General and administrative           |   | 1,681,664                           |      | 1,979,447 |   |
|                                 |   | 2,756,656                           |      | 3,039,252 |   |
|                                 |   |                                |      |   |   |
| Income from operations               |   | 52,207                              |      | 282,124 |   |
|                                 |   |                                |      |   |   |
| Other income (expense):              |   |                                |      |   |   |
| Other income                         |   | 13,233                              |      | 35,588 |   |
| Interest expense                     |   | (185,211                            | )         | (209,806 | ) |
|                                 |   | (171,978                            | )         | (174,218 | ) |
|                                 |   |                                |      |   |   |
| (Loss) Income before taxes           |   | (119,771                            | )         | 107,906 |   |
| Income tax benefit                   |   | (38,932                             | )         | (12,069 | ) |
|                                 |   |                                |      |   |   |
| Net (loss) income                    |   | $                                   | (80,839   | ) | $ | 119,975 |   |
|                                 |   |                                |      |   |   |
| (Loss) Earnings per share:           |   |                                |      |   |   |
| Basic                                |   | $                                   | (0.01     | ) | $ | 0.02 |   |
| Diluted                              |   | $                                   | (0.01     | ) | $ | 0.02 |   |
|                                 |   |                                |      |   |   |
| Weighted-average shares outstanding: |   |                                |      |   |   |
| Basic                                |   | 5,485,350                           |      | 5,224,474 |   |
| Diluted                              |   | 5,485,350                           |      | 5,584,174 |   |

 

The accompanying notesare an integral part of these financial statements.

 

4

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ON-SITESOURCING, INC.

CONDENSEDSTATEMENTS OF CASH FLOWS

 
|                                      |   | **Unaudited  Three Months Ended  March 31** |     |
|-------------------------------------------|--------|---------------------------------------------|----------|
|                                      |   |                                        |     |   |   |
|                                      |   | **2003**                                    |     | **2002** |   |
| Cash flows from operating activities:     |   |                                        |     |   |   |
| Net cash used in operations               |   | $                                           | (324,437 | ) | $ | (616,054 | ) |
|                                      |   |                                        |     |   |   |
| Cash flows from investing activities:     |   |                                        |     |   |   |
| Acquisition of property and equipment     |   | (68,052                                     | )        | (1,072,467 | ) |
| Receipt of payments on notes receivable   |   | 6,202                                       |     | 45,253 |   |
| Proceeds from disposal of equipment       |   | 728                                         |     | 15,777 |   |
|                                      |   |                                        |     |   |   |
| Net cash used in investing activities     |   | (61,122                                     | )        | (1,011,437 | ) |
|                                      |   |                                        |     |   |   |
| Cash flows from financing activities:     |   |                                        |     |   |   |
| Proceeds from sale of common stock        |   | 27,083                                      |     | 323,679 |   |
| Payments of long-term debt                |   | (280,462                                    | )        | (289,032 | ) |
| Borrowings under line of credit           |   | 4,875,410                                   |     | 5,153,587 |   |
| Payments on line of credit                |   | (4,236,472                                  | )        | (3,560,494 | ) |
|                                      |   |                                        |     |   |   |
| Net cash provided by financing activities |   | 385,559                                     |     | 1,627,740 |   |
|                                      |   |                                        |     |   |   |
| Net change in cash                        |   | —                                      |     | 249 |   |
| Cash, beginning of period                 |   | 4,279                                       |     | 3,282 |   |
| Cash, end of period                       |   | $                                           | 4,279    |   | $ | 3,531 |   |

 

The accompanying notesare an integral part of these financial statements.

 

5

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**ON-SITE SOURCING, INC.**

**NOTESTO FINANCIAL STATEMENTS**

**(unaudited)**

#### ***1. Natureof Business***

 

On-Site Sourcing,Inc. (the Company) was incorporated in the Commonwealth of Virginia in December1992 and changed its state of incorporation to Delaware in January 1996.  The Company provides digital imaging, reprographics,and color and digital printing to law firms and other organizations throughoutthe United States. Services are primarily performed in the metropolitan areasof Philadelphia, Pennsylvania, Washington, D.C., Atlanta, Georgia, New York,New York, Gaithersburg, Maryland, and Tempe, Arizona (through October 15,2002).  In August 2002, the Companyexpanded its operations to Chicago, Illinois and Wilmington, Delaware.

 

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

 

#### ***2***. Basisof 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, 2002, as filed with the Securities and Exchange Commissionon Form 10-K.  The results of operations for the three-month periods endedMarch 31, 2003 and 2002 may not be indicative of the results for the full year.

 

**3.Summary of Significant Accounting Policies**

### ** **

#### ***Revenue Recognition***

 

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.

 

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.

 

6

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Concentration of Credit Risks

 

Financialinstruments that potentially subject the Company to significant concentrationsof credit risk consist principally of accounts receivable.  The Companygenerally sells its products to law firms and other commercial customerslocated in the United States.  The Company grants credit terms withoutcollateral to its customers and has not experienced any significant credit relatedlosses.  Accounts receivable includeallowances to record receivables at their estimated net realizable value.

 

Goodwill

 

The Company accounts for goodwill in accordance with Statement ofFinancial Accounting Standard (SFAS) No. 142, Goodwill and Other IntangibleAssets (SFAS No. 142).  SFAS No. 142 requires the Company to compare theestimated fair value of the reporting unit to its carrying amount to determineif there is potential impairment.  If the estimated fair value of thereporting unit is less than its carrying value, an impairment loss is recordedto the extent that the fair value of the goodwill is less than its carryingvalue.  If the carrying value of the goodwill exceeds its fair value, animpairment loss is recognized.  The Company determined there was noimpairment of goodwill during the periods reported.

 

Impairment of Long-Lived Assets 

 

Long-lived assets, primarily property and equipment, are reviewed forimpairment whenever events or changes in circumstances indicate that thecarrying amount of the assets might not be recoverable. The Company does notperform a 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 recognizes an impairment loss only if its carryingamount is not recoverable through its undiscounted cash flows and measures theimpairment loss based on the difference between the carrying amount andestimated fair value.

 

Derivative Instrument and Hedging Activity

 

The Company uses an interest rate swap to convert its variable-rateinterest payments on its mortgage ($5,361,747 at March 31, 2003) to fixed-rateinterest payments. This interest rate swap has been designated and qualifies asa cash-flow hedge under SFAS No. 133, “Accounting for Derivative Instrumentsand 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).  The Companyhas determined that its interest rate swap was highly effective upon adoptingSFAS No. 133.

 

As of and for the three months ended March 31, 2003, the Companyrecorded a non-current liability of $893,210, which represented the estimatedfair value of the interest rate swap, along with an unrealized after-tax lossof $539,409 in Other Comprehensive Loss, which is a component of Stockholders’Equity.

 

7

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Stock-Based Compensation

 

The Company uses the intrinsic-value method in accounting for itsemployee stock options rather than the alternative fair value accountingmethod. Companies that follow the intrinsic-value method must provide pro formadisclosure of the impact of applying the fair-value method.

 

The following table summarizes relevant information as to reportedresults under the Company’s intrinsic-value method of accounting for stockawards, with supplemental information as if the fair value recognitionprovisions had been applied:

 

|                                           |   | **For the  Three Months Ended March 31,** |     |
|------------------------------------------------|--------|-------------------------------------------|----------|
|                                           |   | **2003**                                  |     | **2002** |   |
| Net income, as  reported                       |   | $                                         | (80,839  | ) | $ | 119,975 |   |
| Less:  stock-based compensation                |   | 91,547                                    |     | 95,285 |   |
| Adjusted net  (loss) income                    |   | $                                         | (172,386 | )  | $ | 24,690 |   |
|                                           |   |                                      |     |   |   |
| Basic earnings  per share – as reported   |   | $                                         | (0.01    | ) | $ | 0.02 |   |
| Diluted earnings  per share – as reported |   | $                                         | (0.01    | ) | $ | 0.02 |   |
| Basic earnings  per share – as adjusted   |   | $                                         | (0.03    | )  | $ | — |   |
| Diluted earnings  per share – as adjusted |   | $                                         | (0.03    | )  | $ | — |   |

 

The fair value for each option granted was estimated at the date ofgrant using the Black-Scholes option-pricing model, assuming no expecteddividends and the following weighted average assumptions:

 
|                              |   | **For the  Three Months Ended March 31,** |    |
|-----------------------------------|--------|-------------------------------------------|---------|
|                              |   | **2003**                                  |    | **2002** |   |
| Average  risk-free interest rate  |   | 4.94                                      | %  | 5.45 | % |
| Average expected  life (in years) |   | 5                                         |    | 5 |   |
| Volatility                        |   | 82.78                                     | %  | 81.17 | % |

 

Reclassifications

 

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

 

**4. Comprehensive Income**

 

SFAS No. 130,“Reporting Comprehensive Income”, requires that total comprehensive income(loss) be disclosed with equal prominence as net income (loss).   Comprehensive income (loss) is defined aschanges in stockholders’ equity exclusive of transactions with owners, such ascapital contributions and dividends.  TheCompany’s total comprehensive income (loss) is comprised of net income (loss)and other comprehensive loss, which consists of changes in the estimated fairvalue of the interest rate swap contract.  At March 31, 2003 and 2002, the components of comprehensive income(loss) were as follows:

 

8

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|                         |   | **(Unaudited)  Three Months Ended  March 31,** |     |
|------------------------------|--------|------------------------------------------------|----------|
|                         |   | **2003**                                       |     | **2002** |   |
| Net (loss) income            |   | $                                              | (80,839  | ) | $ | 119,975 |   |
| Other comprehensive loss:    |   |                                           |     |   |   |
| Interest rate swap  contract |   | (539,409                                       | )        | (265,000 | ) |
|                         |   |                                           |     |   |   |
| Comprehensive loss           |   | $                                              | (620,248 | ) | $ | (145,025 | ) |

 

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

 

Basic earnings(loss) per share excludes dilution and is computed by dividing the net income(loss) by the weighted-average number of common shares outstanding.  Diluted earnings per share is computed byadditionally reflecting the potential dilution that could occur, using thetreasury stock method, if options to acquire common stock were exercised andresulted in the issuance of common stock. Diluted loss per share excludes theeffect of common stock options because their inclusion would have beenanti-dilutive.  A reconciliation of theweighted-average number of common shares outstanding assuming dilution is asfollows:

 

|                                                           |   | **(Unaudited)  Three Months Ended  March 31,** |    |
|----------------------------------------------------------------|--------|------------------------------------------------|---------|
|                                                           |   | **2003**                                       |    | **2002** |   |
|                                                           |   |                                           |    |   |   |
| Net (loss) income                                              |   | $                                              | (80,839 | ) | $ | 119,975 |   |
|                                                           |   |                                           |    |   |   |
| Weighted average common  shares Outstanding                    |   | 5,485,350                                      |    | 5,224,474 |   |
| Dilutive effect of  outstanding stock options                  |   | —                                         |    | 359,700 |   |
|                                                           |   |                                           |    |   |   |
| Weighted average common  shares outstanding, assuming dilution |   | 5,485,350                                      |    | 5,584,174 |   |
|                                                           |   |                                           |    |   |   |
| Net (loss) income per  share:                                  |   |                                           |    |   |   |
| Basic                                                          |   | $                                              | (0.01   | ) | $ | 0.02 |   |
| Diluted                                                        |   | $                                              | (0.01   | ) | $ | 0.02 |   |

 

For the threemonths ended March 31, 2003 and 2002, 790,083 and 133,500 options respectively,were excluded from the above reconciliation, as these options wereanti-dilutive for these periods.  Forthe three months ended March 31, 2003 as a result of a net loss, 22,028 stockoptions were excluded from the diluted loss per share calculation, as theshares were anti-dilutive.

 

9

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**6.Segment Information**

 

The Company isorganized and operates in three significant segments: reprographics, imaging,and digital printing services.  UntilDecember 31, 2001, the Company also had a facility management services segment.This segment was significantly reduced during the first quarter of 2002; asmost of the service contracts were terminated by the Company.  At March 31, 2003, the Company has one suchcontract remaining.  Management does notview facility management services as a separate segment for the periodsreported.  In the summary of the resultsof the Company’s operating segments below, the results for the remainingfacility management contract are listed under the heading other.

 

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

 

Imaging services involves the conversion or transfer of the traditionalpaper and electronic documents into electronic media or vice-versa. Servicesprovided in the 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, the 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. Typical customers include organizations requiring print media. Inaddition, ancillary services, which include graphic design, mailing, specialfinishing, storage, fulfillment, and delivery services are provided through thedigital printing segment. Printing jobs are typically billed on a job-by-jobbasis depending on several factors, including quantity, number of colors,quality of paper, and graphic design time.

 

The Company evaluates its segments’ performance based on revenue andresults from operations before allocation of corporate administrative expensesand income taxes.  A summary of theresults of the Company’s operating segments is as follows:

 

10

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|                       |   | **(Unaudited)  Three Months Ended  March 31,** |      |
|----------------------------|--------|------------------------------------------------|-----------|
|                       |   | **2003**                                       |      | **2002** |   |
| Revenue                    |   |                                           |      |   |   |
| Reprographics              |   | $                                              | 4,782,620 |   | $ | 4,420,342 |   |
| Imaging                    |   | 3,001,035                                      |      | 3,286,272 |   |
| Digital printing           |   | 826,674                                        |      | 911,815 |   |
| Other                      |   | 249,412                                        |      | 303,109 |   |
| Inter-segment  elimination |   | (23,673                                        | )         | (71,303 | ) |
|                       |   |                                           |      |   |   |
| Total revenue              |   | $                                              | 8,836,068 |   | $ | 8,850,235 |   |

 

|                               |   | **(Unaudited)  Three Months Ended  March 31,** |     |
|------------------------------------|--------|------------------------------------------------|----------|
|                               |   | **2003**                                       |     | **2002** |   |
| (Loss)Income before  taxes:        |   |                                           |     |   |   |
| Reprographics                      |   | $                                              | 478,847  |   | $ | 664,067 |   |
| Imaging                            |   | 684,920                                        |     | 998,470 |   |
| Digital printing                   |   | (61,532                                        | )        | 19,006 |   |
| Other                              |   | 13,304                                         |     | 51,400 |   |
| Corporate  administrative expenses |   | (1,235,310                                     | )        | (1,625,037 | ) |
|                               |   |                                           |     |   |   |
| Total (loss) income  before taxes  |   | $                                              | (119,771 | ) | $ | 107,906 |   |

 

**7.****              Lineof Credit and Other Debt**

 

The Company had a working capital line of credit with a bank in theamount of $7 million at March 31, 2003. The working capital line of credit is collateralized by accountsreceivable and certain equipment as described in the underlying agreement.  The Company has the capacity to borrow, atany given time, the lesser of the established line of credit or eligibleaccounts receivable, generally defined as 75% of accounts receivable that areless than 120 days old.  On March 24, 2003 the Company extended the termof the line of credit agreement to May 2004. The line of credit bears interest at the lesser of the bank’s prime rateor the 30-day LIBOR plus 2.20% (3.46% at March 31, 2003).   At March 31, 2003, the Company hadapproximately $1.8 million available to draw against the credit line.

 

The Company has amortgage note and two term notes (the Notes) to the same bank.  At March 31, 2003, the total borrowingsunder the line of credit and the Notes from the bank were approximately $11million.  The underlying agreementsrelated to these debts provide cross-default protection provisions to thelender, and require compliance with certain financial covenants.

 

A significantcovenant requires the Company to maintain an Interest Coverage Ratio, as defined,in excess of 2.0:1. During the quarter ended September 30, 2002, due to asignificant quarterly net loss, the Company was not in compliance with thiscovenant.  As a result, the Companyobtained a waiver of the covenant for the third and fourth quarters of2002.  The Company met all otherfinancial covenants throughout the year in 2002 and was in compliance with allcovenants at December 31, 2002.  Duringthe first quarter of 2003, upon the Company’s request, the bank modified andreduced the Interest Coverage 

 

11

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Ratio requirementto 1.75:1 for the quarters ending March 31, 2003 and June 30, 2003, after whichthe ratio reverts back to 2.0:1. The modification also allows the exclusion ofcertain charges, deemed as one time in nature, from the computation of theInterest Coverage Ratio, with advance approval from the bank.  The Company has received approval to excludecertain one-time charges.

 

At March 31, 2003,the Company met all its financial covenants, as modified.  Based on the results of the first quarter of2003 and future unpredictability of profitability, in May 2003, the Companyobtained approval from the bank to reduce the required Interest Coverage Ratioto 1.25:1 for the quarter ending June 30, 2003, after which the ratio revertsback to 2.0:1.

 

The Companybelieves it will be in compliance with all of the covenants, as modified,within the next twelve months following March 31, 2003.  In the event the Company is not incompliance with the debt covenants, the bank has the right to call forimmediate payments on some or all debt borrowings covered under the debtagreements with the bank (approximately $11 million at March 31, 2003).  If such an event were to occur, the Companymay be forced to seek alternative sources of funding.  The Company does not believe such an event is likely to occur.

 

Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations

 

On-Site Sourcing,Inc. (On-Site, the Company, we, us, or our) provides document and informationmanagement services through its facilities in the greater Atlanta, Baltimore,New York City, Philadelphia, Washington, D.C., Chicago, and Wilmingtonmetropolitan areas, and served clients on the West Coast through its Tempe,Arizona facility (through October 15, 2002). We help clients in information-intensive industries manage large volumesof documents and information, allowing them to concentrate on their corebusiness operations. Our target clients typically generate large volumes ofdocuments and information that require specialized processing, distribution,storage, and retrieval.  Our typicalclients include law firms, insurance companies, healthcare organizations,non-profit organizations, accounting, consulting and finance firms and otherorganizations throughout the United States. We also provide commercial printing services utilizing digital printingtechnology 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 wasoriginally incorporated in Virginia in December 1992, and changed its state ofincorporation to Delaware in March 1996.

 

**ForwardLooking Disclosure**

 

Certain informationincluded herein contains forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995.  All statements other than statements of historical fact,including statements regarding industry prospects, plans for future expansionand other business development activities as well as future results ofoperations or financial position and the effects of competition are forwardlooking.  Such forward-lookinginformation is subject to changes and variations which are not reasonablypredictable and which could significantly affect future results.  Accordingly, such results may differ fromthose expressed in any forward-looking statements made by or on behalf of theCompany.  The risks and uncertaintiesthat could significantly affect future results include, but are not limited to,those relating to the adequacy of operating and management controls, operatingin a competitive environment and a changing environment, including newtechnology and processes, existing and future vendor relationships, theCompany’s ability to access capital and meet its debt service 

 

12

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requirements, dependenceon existing management, general economic conditions, terrorist attacks, andchanges in federal or state laws or regulations.  These risks and uncertainties, along with the followingdiscussion, describe some, but not all, of the factors that could cause actualresults to differ significantly from management’s expectations.

 

**CriticalAccounting Policies and Judgments**

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires estimates and assumptions that affect the reported amounts of assetsand liabilities, revenue and expenses, and related disclosures of contingentassets and 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 identified the critical accountingpolicies and judgments addressed below. Although we believe that our estimates and assumptions are reasonable,they are based upon information presently available.  Actual results may differ significantly from these estimatesunder different assumptions or conditions.

 

**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,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.

 

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 sameperiod when the related services are delivered and the revenue is recognized.

 

Included in “Accounts receivable, net” on our Balance Sheets is anallowance for doubtful accounts.  Seniormanagement reviews the accounts receivable aging on a monthly basis todetermine if any receivables will potentially be uncollectable.  After all attempts to collect the receivablehave failed, the receivable is written off against the allowance.  Based on the information available to us, webelieve our allowance for doubtful accounts as of March 31, 2002 isadequate.  However, no assurances can begiven that actual write-offs will not exceed the recorded allowance.

 

**Accounting for Goodwill**

 

Effective January 1, 2002, the Company adopted the full provisions ofSFAS No. 142.  In accordance with SFASNo.142, the Company records impairment losses on goodwill when events andcircumstances indicate that such assets might be impaired and the estimatedfair value of the asset is less than its recorded amount. Conditions that wouldnecessitate an impairment assessment include material adverse changes inoperations, significant adverse differences in actual results in comparisonwith initial valuation forecasts prepared at the time of acquisition, adecision to abandon acquired products, services or technologies, or othersignificant adverse changes that would indicate the carrying amount of therecorded asset might not be recoverable. The fair value for goodwill is estimated using the discounted cash flowmodel, with the Company’s own assumptions. At March 31, 2003 the Company noted no conditions or 

 

13

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change in circumstances that would render an impairment assessment.  Change in management’s judgment may lead tosignificantly different results.

 

**Accounting for Derivative Instrumentand Hedging Activity**

 

The Company uses an interest rate swap to convert its variable-rateinterest payments on its mortgage ($5,361,747 at March 31, 2003) to fixed-rateinterest payments. This interest rate swap was designated as a cash-flow hedgeand qualified for the short-cut method of assessing effectiveness under SFASNo. 133 , “Accounting for Derivative Instruments and Hedging Activities” (SFASNo. 133).

 

SFAS No.133 requires the Company to carry all derivative financialinstruments on the balance sheet at fair value.  Fair value is obtained from the lending institution on aquarterly basis, and is based on interest rates at the inception of the hedge,current interest rates, and remaining time period until maturity on theunderlying debt. Changes in fair value of effective cash flow hedges arerecorded as a component of Other Comprehensive Income (Loss) until the hedgedtransaction occurs, which at that time is recognized in earnings (loss).  The Company assumes the hedged transactionwill occur during the term of the underlying agreement.  Results of operations may be materiallyaffected if such transaction were not to occur.

 

**Long-lived Assets**

 

Long-lived assets (primarily propertyand equipment) are reviewed for impairment whenever events or changes incircumstances indicate the carrying amount of the assets might not berecoverable. The Company views the following as conditions that necessitateimpairment: a significant decline in the observable market value of an asset, asignificant change in the extent or manner in which an asset is used, or asignificant adverse change that would indicate that the carrying amount of anasset or group of assets is not recoverable. For long-lived assets to be heldand used, the Company measures fair value based on quoted market prices,discounted estimates of future cash flows or other methods. For the threemonths ended March 31, 2003, the Company did not note any events or changes incircumstances indicating the carrying amount of long-lived assets were notrecoverable.  The carrying amount oflong-lived assets is based on management’s judgment as to estimated futureperformance of the business.  Changes injudgments regarding future performance may lead to a different result.

 

**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 reversed. The Company provides avaluation allowance for deferred tax assets for amounts it considersunrealizable.  As of March 31, 2003, theCompany 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, theCompany is subject to certain claims and legal proceedings.  We record an accrued liability for thesematters when an adverse outcome is probable and the amount of the potentialliability is reasonably estimable.  Wedo not believe that the resolution of these matters will have a material effectupon our financial condition, results of operations or cash flows for aninterim or annual period.

 

14

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**RESULTS OF OPERATIONS**

 

**ThreeMonths Ended March 31, 2003 Compared with Three Months Ended March 31, 2002**

 

**REVENUE**

 

Revenue for the three months endedMarch 31, 2003 decreased by $14,167, to $8,836,068 from $8,850,235 in thecomparable period in 2002.  Due toinclement weather in New York, Pennsylvania, Delaware, and the Washington, DCarea in February 2003, our production facilities lost several days ofproduction time, resulting in lost revenue. The decrease in revenue was also the result of reduced pricing on someof the services offered due to competitive pricing being offered bycompetitors.

 

The Company generates a largepercentage of its revenue from law firms, which typically engage in largetransactional matters involving business combinations. Over the last 18 monthsthe Company has seen a significant decrease in these types of transactionalmatters as a result of the overall state of the economy and businessenvironment.  The Company, in order tolessen its dependence on law firms, is actively pursuing other sources ofrevenue, including other market segments such as government, healthcare,insurance and Fortune 1000 organizations.

 

Revenue by reporting segment isincluded in the Notes to Financials Statements in this quarterly report on Form10Q.

 

**GROSS PROFIT**

 

Gross profit decreasedapproximately $513,000, or 15.4%, to $2.8 million for the three months endedMarch 31, 2003 as compared to the comparable period in 2002.  Gross profit as a percentage of salesdecreased from 37.5% for the three months ended March 31, 2002 to 31.8% for thecomparable period in 2003.  Gross profitwas negatively impacted as a result of a competitive pricing environment and aservice mix that was more heavily weighted on labor-intensive services ratherthan Electronic File Processing and other automated services. 

 

**SALES AND MARKETING EXPENSES**

 

Sales and marketing expense increased approximately $15,000,or 1.4%, to approximately $1.1 million for the three months ended March 31,2003 as compared to the comparable period in 2002.  Sales and marketing expenses for the three months ended March 31,2003, as a percentage of sales, increased to approximately 12.2% fromapproximately 12.0% in the comparable period in 2002.  Sales and marketing expense primarily consists of salescommissions, salaries and related costs, travel and entertainment, and othercosts related to our sales staff. Commissions to our account executives are paid on an individual 

 

15

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job-by-job basis, depending on profitability of theparticular job.  Selling expensefluctuates with the number of  “house”account sales, on which no commissions are paid, and “commissioned” accounts onwhich sales commissions are paid.  TheCompany has hired additional account executives with commissioned accountssince the comparable period in 2002, causing sales and marketing expense toincrease.

 

**GENERAL AND ADMINISTRATIVE EXPENSES**

 

General and administrative expenses decreased approximately$300,000 or 15.0%, to approximately $1.7 million for the three months endedMarch 31, 2003 from approximately $2.0 million in the comparable period in2002.  General and administrativeexpenses as a percentage of sales decreased from 22.4% for the three monthsended March 31, 2002 to 19.0% in the comparable period in 2003.  Significant factors that contributed to thedecreased expense for the three months ended March 31, 2003 include thefollowing:

 

Approximately $140,000 of the decrease for the three monthsended March 31, 2003 compared to the three months ended March 31, 2002 is dueto a reduction of bonus payments awarded to divisional managers.  The decrease is due to the majority of thedivisional managers not meeting the goals set in their bonus plans for2003.  The bonus plans for 2003 arebased on the performance of each segment, reprographics, imaging, and digitalprinting.  In 2002 the bonus plans werebased on the performance of each individual location.

 

Approximately $50,000 of the decrease for the three monthsended March 31, 2003 compared to the three months ended March 31, 2002 is dueto decreased travel between cities by executive and management level employees.

 

Approximately $20,000 of the decrease for the three monthsended March 31, 2003, compared to the three months ended March 31, 2002 is dueto a decrease in depreciation costs.  Wehave experienced a significant decrease in capital expenditures in the last sixmonths, resulting in only a minimal increase in related monthly depreciationcost.  This increase has been offset bya decrease in depreciation costs as a result of assets reaching the end oftheir depreciable lives and the disposal of certain non-performing assets.

 

Approximately$30,000 of the decrease for the three months ended March 31, 2003, compared tothe three months ended March 31, 2002 is due to a decrease in outside andprofessional fees expense.  The decreasein expense is primarily due to a reduction in legal fees and placement fees.

 

Approximately$50,000 of the decrease for the three months ended March 31, 2003 compared tothe three months ended March 31, 2002 is due to a decrease in officeexpense.  Office expense includesnon-production related office supplies, cleaning supplies, break room suppliesand payroll processing fees.  Theclosing of the Arizona office and the increased cost reduction efforts havecontributed to the decrease in office expense and the overall decrease ingeneral and administrative expense.

 

**OTHER INCOME AND EXPENSE**

 

Other income for the three months ended March 31, 2003 was approximately$13,000 compared to approximately $36,000 in the comparable period in 2002, adecrease of approximately $23,000.  Thehigher income in the three-month period in 2002 was attributable to rentalincome generated from subletting portions of the building purchased by theCompany in Alexandria, Virginia.  TheCompany 

 

16

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currently is using parts of the building for the corporateheadquarters that were sublet in 2002, causing the decrease in other income.  The Company continues to collect rentalincome from one tenant whose lease expires in April 2004.

 

Interest expense for the three months ended March 31, 2003 totaledapproximately $185,000 compared to approximately $210,000 for the comparableperiod in 2002, a decrease of approximately $25,000.  The decrease is dueto reduced overall market rates of interest related to borrowings under termnotes and certain other current debt arrangements, and lower utilization of theCompany’s line of credit. The Company also currently has less outstanding interm notes as of March 31, 2003 than at March 31, 2002.  The Company’s line of credit balance as ofMarch 31, 2003 was $3,500,352 compared to $4,713,259 as of March 31, 2002.

 

**INCOME TAXES**

 

For the three months ended March 31, 2003 the Companyrecorded income tax benefit of $38,932, compared to $12,069 for the comparableperiod in 2002.  The increase in taxbenefit was the result of a net loss for the quarter ended March 31, 2003.

 

##### **LIQUIDITYAND CAPITAL RESOURCES**

 

We have funded our expansion by utilizing internally generated cashflow, long term financing, and a short-term commercial line of credit. Forour short-term liquidity, we rely on our line of credit, the availability ofwhich depends on the Company’s accounts receivable balances, and cash flowsfrom operations.  The Company mayexperience an inability to meet its capital requirements if any one or acombination of the following occur: significant losses from operations,significant decrease in revenues, default of certain line of credit covenants,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.

 

We anticipate the cash flow from operations and credit facilities willbe sufficient to meet the expected cash requirements for the next twelvemonths. There can be no assurances that unforeseen events may require moreworking capital than we have at our disposal. In order to meet its capital requirements, the Company may seekadditional sources of financing.  Thesemay include collateral-based loans, capital leases, and operating leases.

 

As of March 31, 2003 we had approximately $4,300 in cash, and workingcapital of approximately $2.6 million.  In order to ensure additional working capital is available to fundour operations, we had available a $7 million working capital line of credit asof March 31, 2003 and through May 2004.  The Company has the capacity toborrow, at any given time, the lesser of the established line of credit oreligible accounts receivable, generally defined as 75% of accounts receivablethat are less than 120 days old.  As of March 31, 2003 we had availableapproximately $1.8 million under the line of credit.  The working capital line of credit bears interest at the lesserof the bank’s prime rate of interest or the 30-day LIBOR plus 2.20%.

 

At March 31, 2003, the Company had a mortgage note payable (Mortgage)with a carrying amount of $5,361,747. The mortgage was to fund the purchase of the Alexandria, Virginiaproperty.  In order to manage interestcosts and exposure to changing interest rates on the mortgage loan, the Companyentered into an interest rate swap agreement in which the interest rate isfixed at 9.48%.  Under the terms of thenote and related interest rate swap agreements, the Company is required to makemonthly principal and interest payments in the aggregate of $60,495 for aperiod of seven years, and a lump-sum payment of $4,155,254 when the notebecomes due in October 2007.

 

17

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In September 2002, the Company entered into a note payable in theamount of $1,250,000 (the Note).  Thenote was obtained to create additional borrowing capacity, in the event it is needed,under the current line of credit agreement. Under the terms of the Note, the Company is required to make monthlyprincipal and interest payments in the aggregate of $34,722 for a period ofthree years.  The unpaid principalamount bears interest at a fluctuating annual rate equal to the 1 — Month LIBORplus 2.50%.

 

The Company has obtained financing for certain equipment (EquipmentFinancing) in the aggregate amount of $1,780,300 as of March 31, 2003.  The underlying notes are secured by the underlying equipment and accruesinterest at the rate of the 30-day LIBOR plus 2.50% and matures in August 2006.

 

The Mortgage, the Note, the Equipment Financing, and the line of creditarrangements were obtained from the same bank. As of March 31, 2003 the total borrowing from the bank was$11,125,348.  The underlying agreementsrelated to this debt provide cross-default protection provisions to the lenderand require certain financial covenants.

 

A significantcovenant requires the Company to maintain an Interest Coverage Ratio, asdefined, in excess of 2.0:1. During the quarter ended September 30, 2002, dueto a significant quarterly net loss, the Company was not in compliance withthis covenant.  As a result, the Companyobtained a waiver of the covenant for the third and fourth quarters of2002.  The Company met all otherfinancial covenants throughout the year in 2002 and was in compliance with allcovenants at December 31, 2002.  Duringthe first quarter of 2003, upon the Company’s request, the bank reduced theInterest Coverage Ratio requirement to 1.75:1 for the quarters ended March 31,2003 and June 30, 2003, after which the ratio reverts back to 2.0:1. Themodification also allows the exclusion of certain charges, deemed as one timein nature, from the computation of the Interest Coverage Ratio, with advanceapproval from the bank.  The Company hasreceived approval to exclude certain one-time charges.

 

At March 31, 2003,the Company met all its financial covenants, as modified.  Based on the results of the first quarter of2003 and future unpredictability of profitability, in May 2003, the Companyobtained approval from the bank to reduce the required Interest Coverage Ratioto 1.25:1 for the quarter ending June 30, 2003, after which the ratio reverts backto 2.0:1.

 

The Companybelieves it will be in compliance with all of the covenants, as modified,within the next twelve months following March 31, 2003.  In the event the Company is not incompliance with the debt covenants, the bank has the right to call forimmediate payments on some or all debt borrowings covered under the debtagreements with the bank (approximately $11 million at March 31, 2003).  If such an event were to occur, the Companymay be forced to seek alternative sources of funding.  The Company does not believe such an event is likely to occur.

 

The following summarizes, as of March 31, 2003, our obligations andcommitments to make future payments (principal and interest) under contracts,including debt and lease arrangements. We expect to fund such obligations from cash generated from operatingactivities and funding from our line of credit.

 

18

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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                      |   | $ | 3,500,352 |   | 3,500,352 |   | — |   | — |   | — |   |
| Building Mortgage                   |   | 7,482,480 |   | 725,940 |   | 2,177,820 |   | 4,578,720 |   | — |   |
| Long-Term Debt                      |   | 2,426,974 |   | 864,965 |   | 1,562,009 |   | — |   | — |   |
| Lease Commitments                   |   | 6,283,804 |   | 1,988,853 |   | 3,545,567 |   | 514,278 |   | 235,106 |   |
| Total Contractual  Cash Obligations |   | $ | 19,693,610 |   | $ | 7,080,110 |   | $ | 7,285,396 |   | $ | 5,092,998 |   | $ | 235,106 |   |
|                                     |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

## ***Item3. Quantitative and Qualitative Disclosures aboutMarket Risk***

 

The Company’s activities expose it to market risks that are related tothe effects of changes in interest rates. The Company maintains an interest rate risk management strategy thatuses a derivative instrument to minimize significant, unanticipated earningsfluctuations that may arise from volatility in interest rates.

 

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

 

Based upon the composition of the Company’s variable-rate debtoutstanding at March 31, 2003, which is primarily borrowings under the workingcapital line of credit and promissory notes, we do not believe that ahypothetical increase in the bank’s prime rate of interest or the 30-day LIBORwould be material to net income.

 

**Item 4. Controls and Procedures**

 

Within 90 days prior to the filing date of this report, we evaluatedthe effectiveness of the design and operation of our disclosure controls andprocedures, which are designed to ensure the timeliness and accuracy of ourdisclosures and financial statements. This evaluation was under the supervision and with the participation ofmanagement, including our Chief Executive Officer and Chief FinancialOfficer.  The Company and managementalso recognized that all disclosure controls and procedures have certain limitationsbased on cost-benefit considerations, and can only provide reasonableassurances of achieving the desired control objectives.  Based upon the evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures are effective in providing reasonable assurances thatthey are timely alerted to material information required to be included in ourperiod Securities and Exchange Commission filings.

 

There have been no significant changes in the Company’s internalcontrols or in other factors that could significantly affect these controlssubsequent to the date of their evaluation.

 
| **Part  II.   Other Information** |
|---------------------------------------------|
|                                        |   |
| **Item  1.**                                | **Legal Proceedings** |
|                                        |   |
| None.                                       |   |

 

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| **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**                                                                                                                                                                         |
|         |                                                                                                                                                                                          |
|         | None                                                                                                                                                                                          |
|         |                                                                                                                                                                                          |
| **Item  6.** | **Exhibits and Reports**                                                                                                                                                                      |
|         |                                                                                                                                                                                          |
| (A)          | EXHIBITS                                                                                                                                                                                      |
|         |                                                                                                                                                                                          |
|         | Exhibit 10.26 Sixth  Modification of Amended and Restated Revolving Line of Credit Loan Agreement,  Term Loans Agreement and Security Agreement.   Dated May 6, 2003 with Wachovia Bank. |
|         |                                                                                                                                                                                          |
|         | Exhibit 99.1 Certication  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                           |
|         |                                                                                                                                                                                          |
|         | Exhibit  99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                    |
|         |                                                                                                                                                                                          |
| (B)          | REPORTS ON FORM 8-K                                                                                                                                                                           |
| None    |                                                                                                                                                                                          |

 

20

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**SIGNATURE**

 

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

 

 
|         |   | ON-SITE SOURCING, INC.                                    |
|--------------|--------|-----------------------------------------------------------|
|         |   | (Registrant)                                              |
|         |   |                                                      |
| May 15, 2003 |   | /s/ Jason Parikh                                          |   |
| Date         |   | Jason Parikh

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

 

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**CERTIFICATIONS**

 

I, Christopher Weiler, certify that:

 

1. I have reviewed this quarterly report on Form 10-Qof On-Site Sourcing, Inc.;

 

2. Based on my knowledge, this quarterly report doesnot contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

 

3. Based on my knowledge, the financial statements,and other financial information included in this quarterly report, fairlypresent in all material respects the financial condition, results of operationsand cash flows of the registrant as of, and for, the periods presented in thisquarterly report;

 

4. The registrant’s other certifying officers and Iare responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a) designed such disclosure controls and procedures toensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

 

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

 

c) presented in this quarterly report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officers and Ihave disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a) all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b) any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

 

6. The registrant’s other certifying officers and Ihave indicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 

 
| /s/ Christopher Weiler  |
|-------------------------|
| Christopher Weiler      |
| Chief Executive Officer |
| May 15, 2003            |

 

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**CERTIFICATIONS**

 

I, Jason Parikh, certify that:

 

1. I have reviewed this quarterly report on Form 10-Qof On-Site Sourcing, Inc.;

 

2. Based on my knowledge, this quarterly report doesnot contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

 

3. Based on my knowledge, the financial statements,and other financial information included in this quarterly report, fairlypresent in all material respects the financial condition, results of operationsand cash flows of the registrant as of, and for, the periods presented in thisquarterly report;

 

4. The registrant’s other certifying officers and Iare responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a) designed such disclosure controls and procedures toensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

 

b) evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this quarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officers and Ihave disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a) all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b) any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

 

6. The registrant’s other certifying officers and Ihave indicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| /s/ Jason Parikh        |
|-------------------------|
| Jason Parikh            |
| Chief Financial Officer |
| May 15, 2003            |

 

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