**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

 

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

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

**SECURITIES EXCHANGE ACT OF 1934**

 

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

 

**CommissionFile No. 0-20947**

 

**ON-SITE SOURCING, INC.**

(Exact name of registrantas 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 thenumber of shares outstanding of each of the issuer’s classes of common stock,as of July 30, 2002:

 

| Common Stock, $.01 par  value |   | 5,469,450 shares |
|-------------------------------|--------|------------------|

 

 

----

 

ON-SITE SOURCING,INC.

INDEX

 

 
| **Part  I.** | **Financial  Information**                                                                                             |   |
|--------------|------------------------------------------------------------------------------------------------------------------------|--------|
|         |                                                                                                                   |   |
| Item 1.      | Financial Statements:                                                                                                  |   |
|         | Balance Sheets as of June 30, 2002  (unaudited) and December 31, 2001                                                  |   |
|         |                                                                                                                   |   |
|         | Statements of Operations for  the Three and Six Months Ended June 30, 2002 (unaudited) and 2001 (unaudited)            |   |
|         |                                                                                                                   |   |
|         | Condensed Statements  of Cash Flows for the Three and Six Months Ended June 30, 2002 (unaudited)  and 2001 (unaudited) |   |
|         |                                                                                                                   |   |
|         | Notes to Financial  Statements – June 30, 2002 (unaudited)                                                        |   |
|         |                                                                                                                   |   |
| 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                                                            |   |
|         |                                                                                                                   |   |
|         |                                                                                                                   |   |
| **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

 
|                                                                                                                              |   | **June 30,  2002** |       | **December 31,  2001** |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|------------------------|--------|
|                                                                                                                              |   | **(Unaudited)**    |       |                   |   |
| ASSETS                                                                                                                            |   |               |       |                   |   |
|                                                                                                                              |   |               |       |                   |   |
| CURRENT ASSETS:                                                                                                                   |   |               |       |                   |   |
| Cash and cash  equivalents                                                                                                        |   | $                  | 4,031      |                   | $      | 3,282 |   |
| Accounts  receivable, net                                                                                                         |   | 10,076,293         |       | 8,103,379              |   |
| Prepaid supplies                                                                                                                  |   | 533,899            |       | 611,988                |   |
| Prepaid expenses                                                                                                                  |   | 230,330            |       | 242,818                |   |
| Prepaid income  taxes                                                                                                             |   | 75,955             |       | 38,303                 |   |
| Deferred tax  asset                                                                                                               |   | 227,237            |       | —                 |   |
| Notes  receivable, current portion                                                                                                |   | 94,824             |       | 151,580                |   |
| Total current  assets                                                                                                             |   | 11,242,569         |       | 9,151,350              |   |
|                                                                                                                              |   |               |       |                   |   |
| Property and  equipment, net                                                                                                      |   | 15,461,790         |       | 14,933,769             |   |
| OTHER ASSETS                                                                                                                      |   |               |       |                   |   |
| Goodwill, net                                                                                                                     |   | 906,551            |       | 906,551                |   |
| Other assets                                                                                                                      |   | 157,444            |       | 167,258                |   |
| Total assets                                                                                                                      |   | $                  | 27,768,354 |                   | $      | 25,158,928 |   |
|                                                                                                                              |   |               |       |                   |   |
| LIABILITIES AND  STOCKHOLDERS' EQUITY                                                                                             |   |               |       |                   |   |
|                                                                                                                              |   |               |       |                   |   |
| CURRENT  LIABILITIES:                                                                                                             |   |               |       |                   |   |
| Line of credit                                                                                                                    |   | $                  | 4,441,244  |                   | $      | 3,120,166 |   |
| Current portion  of long-term debt                                                                                                |   | 1,271,153          |       | 1,314,396              |   |
| Accounts payable                                                                                                                  |   | 2,326,885          |       | 2,759,191              |   |
| Accrued and  other liabilities                                                                                                    |   | 1,346,219          |       | 738,972                |   |
| Deferred income  taxes                                                                                                            |   | —             |       | 58,735                 |   |
| Total current  liabilities                                                                                                        |   | 9,385,501          |       | 7,991,460              |   |
|                                                                                                                              |   |               |       |                   |   |
| NONCURRENT  LIABILITIES                                                                                                           |   |               |       |                   |   |
| Long-term debt,  net of current portion                                                                                           |   | 6,502,177          |       | 7,030,794              |   |
| Deferred rent                                                                                                                     |   | 224,289            |       | 217,143                |   |
| Deferred income  taxes                                                                                                            |   | 463,122            |       | 374,216                |   |
| Interest rate  swap contract                                                                                                      |   | 626,114            |       | —                 |   |
| Total  liabilities                                                                                                                |   | 17,201,203         |       | 15,613,613             |   |
|                                                                                                                              |   |               |       |                   |   |
| Commitments and  contingencies                                                                                                    |   |               |       |                   |   |
|                                                                                                                              |   |               |       |                   |   |
| STOCKHOLDERS'  EQUITY:                                                                                                            |   |               |       |                   |   |
| Common stock,  $0.01 par value, 20,000,000 shares authorized 5,581,790 and 5,254,259 shares  issued and outstanding, respectively |   | 55,818             |       | 52,543                 |   |
| Additional  paid-in capital                                                                                                       |   | 7,866,360          |       | 7,131,139              |   |
| Accumulated  other comprehensive loss                                                                                             |   | (378,110           | )          | —                 |   |
| Treasury stock,  at cost (113,590 shares)                                                                                         |   | (396,152           | )          | (396,152               | )      |
| Retained  earnings                                                                                                                |   | 3,419,235          |       | 2,757,785              |   |
| Total  stockholders' equity                                                                                                       |   | 10,567,151         |       | 9,545,315              |   |
| Total  liabilities and stockholders' equity                                                                                       |   | $                  | 27,768,354 |                   | $      | 25,158,928 |   |

 

The accompanying notesare an integral part of these financial statements.

 

3

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ON-SITE SOURCING, INC. 

STATEMENT OF OPERATIONS

 
|                                  |   | **(Unaudited)  Three Months Ended** |       | **(Unaudited)  Six Months Ended** |   |
|---------------------------------------|--------|-------------------------------------|------------|-----------------------------------|--------|
|                                  |   | **June 30,  2002**                  |       | **June 30,  2001**                |   | **June 30,  2002** |   | **June 30,  2001** |   |
|                                  |   |                                |       |                              |   |   |   |   |   |
| Revenue                               |   | $                                   | 10,314,192 |                              | $      | 10,332,382 |   | $ | 19,164,427 |   | $ | 19,782,031 |   |
|                                  |   |                                |       |                              |   |   |   |   |   |
| Costs and  expenses:                  |   |                                |       |                              |   |   |   |   |   |
| Cost of sales                         |   | 5,680,992                           |       | 6,653,651                         |   | 11,209,851 |   | 13,016,616 |   |
|                                  |   | 4,633,200                           |       | 3,678,731                         |   | 7,954,576 |   | 6,765,415 |   |
|                                  |   |                                |       |                              |   |   |   |   |   |
| Sales and  marketing                  |   | 1,321,339                           |       | 901,073                           |   | 2,381,144 |   | 1,798,450 |   |
| General and  administrative           |   | 2,182,125                           |       | 1,652,773                         |   | 4,161,572 |   | 3,074,777 |   |
|                                  |   | 3,503,464                           |       | 2,553,846                         |   | 6,542,716 |   | 4,873,227 |   |
|                                  |   |                                |       |                              |   |   |   |   |   |
| Income from  operations               |   | 1,129,736                           |       | 1,124,885                         |   | 1,411,860 |   | 1,892,188 |   |
|                                  |   |                                |       |                              |   |   |   |   |   |
| Other income  (expense):              |   |                                |       |                              |   |   |   |   |   |
| Other income                          |   | 15,922                              |       | 81,211                            |   | 57,553 |   | 153,901 |   |
| Other expense                         |   | (19,656                             | )          | (111,240                          | )      | (25,699 | ) | (175,156 | ) |
| Interest expense                      |   | (219,528                            | )          | (330,523                          | )      | (429,334 | ) | (664,420 | ) |
|                                  |   | (223,262                            | )          | (360,552                          | )      | (397,480 | ) | (685,675 | ) |
|                                  |   |                                |       |                              |   |   |   |   |   |
| Income before  taxes                  |   | 906,474                             |       | 764,333                           |   | 1,014,381 |   | 1,206,513 |   |
| Income tax  expense                   |   | 365,000                             |       | 344,100                           |   | 352,931 |   | 544,100 |   |
|                                  |   |                                |       |                              |   |   |   |   |   |
| Net income                            |   | $                                   | 541,474    |                              | $      | 420,233 |   | $ | 661,450 |   | $ | 662,413 |   |
|                                  |   |                                |       |                              |   |   |   |   |   |
| Earnings per  share:                  |   |                                |       |                              |   |   |   |   |   |
| Basic                                 |   | $                                   | 0.10       |                              | $      | 0.09 |   | $ | 0.12 |   | $ | 0.13 |   |
| Diluted                               |   | $                                   | 0.10       |                              | $      | 0.08 |   | $ | 0.12 |   | $ | 0.13 |   |
|                                  |   |                                |       |                              |   |   |   |   |   |
| Weighted-average  shares outstanding: |   |                                |       |                              |   |   |   |   |   |
| Basic                                 |   | 5,397,766                           |       | 4,943,625                         |   | 5,311,120 |   | 4,943,625 |   |
| Diluted                               |   | 5,696,192                           |       | 4,990,532                         |   | 5,641,182 |   | 4,978,621 |   |

 

The accompanying notesare an integral part of these financial statements.

 

4

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ON-SITE SOURCING, INC.

CONDENSED STATEMENTS OF CASHFLOWS

 
|                                                 |   | **Unaudited  Three Months Ended  June 30** |    | **Unaudited  Six Months Ended  June 30** |   |
|------------------------------------------------------|--------|--------------------------------------------|---------|------------------------------------------|--------|
|                                                 |   | **2002**                                   |    | **2001**                                 |   | **2002** |   | **2001** |   |
| Cash flows from  operating activities:               |   |                                       |    |                                     |   |   |   |   |   |
| Net cash  provided by operations                     |   | $                                          | 767,298 |                                     | $      | 1,364,442 |   | $ | 151,244 |   | $ | 1,776,455 |   |
|                                                 |   |                                       |    |                                     |   |   |   |   |   |
| Cash flows from  investing activities:               |   |                                       |    |                                     |   |   |   |   |   |
| Acquisition of  property and equipment               |   | (638,274                                   | )       | (423,382                                 | )      | (1,710,741 | ) | (670,028 | ) |
| Receipt of  payments on notes receivable             |   | 11,503                                     |    | 10,692                                   |   | 56,756 |   | 31,864 |   |
| Proceeds from  disposition of equipment              |   | —                                     |    | 15,000                                   |   | 15,777 |   | 15,000 |   |
|                                                 |   |                                       |    |                                     |   |   |   |   |   |
| Net cash used in  investing activities               |   | (626,771                                   | )       | (397,690                                 | )      | (1,638,208 | ) | (623,164 | ) |
|                                                 |   |                                       |    |                                     |   |   |   |   |   |
| Cash flows from  financing activities:               |   |                                       |    |                                     |   |   |   |   |   |
| Proceeds from  sale of common stock                  |   | 414,817                                    |    | —                                   |   | 738,496 |   | — |   |
| Proceeds from  collection of subscription receivable |   | —                                     |    | 50,400                                   |   | — |   | 50,400 |   |
| Payments under  debt agreements                      |   | (282,828                                   | )       | (98,608                                  | )      | (571,860 | ) | (444,291 | ) |
| Borrowings under  line of credit                     |   | 4,693,195                                  |    | 5,369,544                                |   | 9,846,782 |   | 9,589,586 |   |
| Payments on line  of credit                          |   | (4,965,211                                 | )       | (6,288,044                               | )      | (8,525,705 | ) | (10,348,533 | ) |
|                                                 |   |                                       |    |                                     |   |   |   |   |   |
| Net cash  provided by (used in) financing activities |   | (140,027                                   | )       | (966,708                                 | )      | 1,487,713 |   | (1,152,838 | ) |
|                                                 |   |                                       |    |                                     |   |   |   |   |   |
| Net increase in  cash and cash equivalents           |   | 500                                        |    | 44                                       |   | 749 |   | 453 |   |
| Cash and cash  equivalents, beginning of period      |   | 3,531                                      |    | 3,837                                    |   | 3,282 |   | 3,428 |   |
| Cash and cash  equivalents, end of period            |   | $                                          | 4,031   |                                     | $      | 3,881 |   | $ | 4,031 |   | $ | 3,881 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

5

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**ON-SITE SOURCING, INC.**

**NOTESTO FINANCIAL STATEMENTS**

**JUNE 30, 2002**

**(unaudited)**

 

**1. Nature of 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,litigation reprographics, and color and digital printing to law firms and otherorganizations throughout the United States. Services are primarily performed inthe metropolitan areas of Philadelphia, Pennsylvania, Washington, D.C.,Atlanta, Georgia, New York, New York, Gaithersburg, Maryland, and Tempe,Arizona.

 

**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 Commissionon Form 10-K.  The results of operations for the three and six-monthperiods ended June 30, 2002 and 2001 may not be indicative of the results forthe full year.

 

**3. Summary of Significant AccountingPolicies**

### ** **

#### ***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, serviceshave been rendered or delivery has occurred, the selling price is fixed ordeterminable, and collectibility is reasonably assured.  Return and bad debt allowances are estimatedusing historical experience.

 

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.

 

6

----

 

Goodwill

 

In July 2001, the Financial Accounting Standards Board issued SFAS No.142, “Goodwill and Other Intangible Assets.” This statement provides accounting and reporting standards forintangible assets acquired individually, with a group of other assets, or aspart of a business combination.  Thisstatement addresses how acquired goodwill and other intangible assets are to beaccounted for after they have been initially recognized in the financialstatements.  Under this statement,goodwill and other intangible assets with indefinite useful lives, on aprospective basis beginning January 1, 2002, will no longer be amortized.  Rather, goodwill and other indefinite-livedassets must be tested for impairment at least annually based on a fair valuecomparison.  Intangible assets that havefinite useful lives will continue to be amortized over their respective usefullives.  This statement also requiresexpanded disclosure for goodwill and other intangible assets.  The Company was required to adopt thisstatement on January 1, 2002.  Uponadoption, the Company completed a transitional impairment test related to theirgoodwill and determined that no impairment existed.

 

In accordance with SFAS No.142, the effect of this accounting change isreflected prospectively from January 1, 2002. Supplemental comparative disclosure, as if the change had beenretroactively applied to the prior year periods, is as follows:

 
|                              |   | **(unaudited)  Three Months Ended  30-Jun** |    | **(unaudited)  Six Months Ended  30-Jun** |   |
|-----------------------------------|--------|---------------------------------------------|---------|-------------------------------------------|--------|
|                              |   | **2002**                                    |    | **2001**                                  |   | **2002** |   | **2001** |   |
| Net income:                       |   |                                        |    |                                      |   |   |   |   |   |
| Reported net income               |   | $                                           | 541,474 |                                      | $      | 420,233 |   | $ | 661,450 |   | $ | 662,413 |   |
| Goodwill amortization, net of tax |   |                                        |    | 15,545                                    |   |   |   | 31,090 |   |
|                              |   |                                        |    |                                      |   |   |   |   |   |
| Adjusted net income               |   | $                                           | 541,474 |                                      | $      | 435,778 |   | $ | 661,450 |   | $ | 693,503 |   |
|                              |   |                                        |    |                                      |   |   |   |   |   |
| Basic income per share:           |   |                                        |    |                                      |   |   |   |   |   |
| Reported net income per share     |   | $                                           | 0.10    |                                      | $      | 0.09 |   | $ | 0.12 |   | $ | 0.13 |   |
| Goodwill amortization             |   | —                                      |    | —                                    |   | — |   | 0.01 |   |
|                              |   |                                        |    |                                      |   |   |   |   |   |
| Adjusted basic income per share   |   | $                                           | 0.10    |                                      | $      | 0.09 |   | $ | 0.12 |   | $ | 0.14 |   |
|                              |   |                                        |    |                                      |   |   |   |   |   |
| Diluted income per share:         |   |                                        |    |                                      |   |   |   |   |   |
| Reported income per share         |   | $                                           | 0.10    |                                      | $      | 0.08 |   | $ | 0.12 |   | $ | 0.13 |   |
| Goodwill amortization             |   | —                                      |    | —                                    |   | — |   | 0.01 |   |
|                              |   |                                        |    |                                      |   |   |   |   |   |
| Adjusted diluted income per share |   | $                                           | 0.10    |                                      | $      | 0.08 |   | $ | 0.12 |   | $ | 0.14 |   |

 

7

----

 

Derivative Instrument and Hedging Activity

 

The Company uses an interest rate swap to convert its variable-rateinterest payments on its mortgage ($5,514,633 at June 30, 2002) to fixed-ratepayments. This interest rate swap has been designated and qualifies as acash-flow hedge under SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities.”

 

SFAS No.133 requires the Company 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 and is recognized inearnings.  The Company has determinedthat its interest rate swap was highly effective from the inception of the swapin December 2000 through June 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 three and six months ended June 30, 2002, the Company recorded a non-current liabilityof $626,114, which represented the estimated fair value of the interest rateswap, along with an unrealized after-tax loss of $378,110 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. Comprehensive Income**

 

SFAS No. 130,“Reporting Comprehensive Income”, requires that total comprehensive income(loss) be disclosed with equal prominence as net income.   Comprehensive income (loss) is defined aschanges in stockholders’ equity exclusive of transactions with owners, such ascapital contributions and dividends. The Company’s total comprehensive income (loss) is comprised of netincome and other comprehensive loss, which consists of changes in the estimatedfair value of the interest rate swap contract.   At June 30, 2002 and 2001, the components of comprehensiveincome were as follows:

 
|                         |   | **(Unaudited)  Three Months Ended  June 30,** |    | **(Unaudited)  Six Months Ended  June 30,** |   |
|------------------------------|--------|-----------------------------------------------|---------|---------------------------------------------|--------|
|                         |   | **2002**                                      |    | **2001**                                    |   | **2002** |   | **2001** |   |
| Net  income                  |   | $                                             | 541,474 |                                        | $      | 420,233 |   | $ | 661,450 |   | $ | 662,413 |   |
| Other comprehensive  loss:   |   |                                          |    |                                        |   |   |   |   |   |
| Interest rate swap  contract |   | (113,110                                      | )       | —                                      |   | (378,110 | ) | — |   |
|                         |   |                                          |    |                                        |   |   |   |   |   |
| Comprehensive Income         |   | $                                             | 428,364 |                                        | $      | 420,233 |   | $ | 283,340 |   | $ | 662,413 |   |

 

8

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**5. Earnings Per Share**

 

Basic earnings pershare excludes dilution and is computed by dividing the net income by theweighted-average number of common shares outstanding.  Diluted earnings per share is computed by additionally reflectingthe potential dilution that could occur, using the treasury stock method, ifoptions to acquire common stock were exercised and resulted in the issuance ofcommon stock.  A reconciliation of theweighted-average number of common shares outstanding assuming dilution is asfollows:

 
|                                                           |   | **(Unaudited)  Three Months Ended  June 30** |    | **(Unaudited)  Six Months Ended  June 30** |   |
|----------------------------------------------------------------|--------|----------------------------------------------|---------|--------------------------------------------|--------|
|                                                           |   | **2002**                                     |    | **2001**                                   |   | **2002** |   | **2001** |   |
|                                                           |   |                                         |    |                                       |   |   |   |   |   |
| Net income                                                     |   | $                                            | 541,474 |                                       | $      | 420,233 |   | $ | 661,450 |   | $ | 662,413 |   |
|                                                           |   |                                         |    |                                       |   |   |   |   |   |
| Weighted average common  shares outstanding                    |   | 5,397,766                                    |    | 4,943,625                                  |   | 5,311,120 |   | 4,943,625 |   |
| Dilutive effect of  outstanding stock options                  |   | 298,426                                      |    | 46,907                                     |   | 330,062 |   | 34,996 |   |
|                                                           |   |                                         |    |                                       |   |   |   |   |   |
| Weighted average common  shares outstanding, assuming dilution |   | 5,696,192                                    |    | 4,990,532                                  |   | 5,641,182 |   | 4,978,621 |   |
|                                                           |   |                                         |    |                                       |   |   |   |   |   |
| Net income per share:                                          |   |                                         |    |                                       |   |   |   |   |   |
| Basic                                                          |   | $                                            | 0.10    |                                       | $      | 0.09 |   | $ | 0.12 |   | $ | 0.13 |   |
| Diluted                                                        |   | $                                            | 0.10    |                                       | $      | 0.08 |   | $ | 0.12 |   | $ | 0.13 |   |

 

For the six-monthperiods ended June 30, 2002 and 2001, 142,833 and 1,197,640 optionsrespectively, were excluded from the above reconciliation, as these optionswere anti-dilutive for these periods because the exercise price of theseoptions was greater than the average market price for the reporting period.

 

**6.Segment Information**

 

The Company isorganized and operates in three significant segments:  reprographics, imaging, and digital printing services.  Until December 31, 2001, the Company alsohad a facility management services segment. This segment was significantlyscaled down during the first quarter of 2002 as most of the service contractswere terminated by the Company, effective the first quarter of 2002.   At June 30, 2002, the Company has one suchcontract remaining.  Management does notview this division as a separate segment for the first and second quarters of2002.

 

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, and Arizona, are open 24 

 

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hours a day, seven days a week to handle the prompt turn around timeoften requested by our customers. A typical job ranges in size from singledocuments with a small number of pages to multiple sets of documents, which canexceed a million pages. A job is typically picked up by our in-house dispatchservice and brought back to our production center. The jobs are then processedper the customer’s instructions and reviewed by our quality control staff.Documents are then returned to the client via our dispatch service.Reprographic jobs are generally billed on a job-by-job basis, based on thenumber of copies and the level of difficulty in copying the original documents.Each of our reprographic centers are staffed with in-house technicians whichservice our copiers in the event they need repairs.

 

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

 

Digital Printing services include both black and white and colordigital production of catalogs, brochures, postcards, stationary, direct mail,newsletters, and exhibit materials. Our target customers for these servicesinclude our existing customers noted above and other organizations requiringprint media. In addition, we also provide ancillary services, which includegraphic design, mailing, special finishing, storage, fulfillment, and deliveryservices. Printing jobs are typically billed on a job-by-job basis depending onseveral factors, including quantity, number of colors, quality of paper, andgraphic 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:

 
|                       |   | **(Unaudited)  Three Months Ended  June 30** |       | **(Unaudited)  Six Months Ended  June 30** |   |
|----------------------------|--------|----------------------------------------------|------------|--------------------------------------------|--------|
|                       |   | **2002**                                     |       | **2001**                                   |   | **2002** |   | **2001** |   |
| Revenue                    |   |                                         |       |                                       |   |   |   |   |   |
| Reprographics              |   | $                                            | 5,210,674  |                                       | $      | 6,230,166 |   | $ | 9,631,017 |   | $ | 11,553,035 |   |
| Imaging                    |   | 4,104,917                                    |       | 2,744,246                                  |   | 7,391,187 |   | 5,442,448 |   |
| Digital printing           |   | 772,969                                      |       | 667,174                                    |   | 1,684,785 |   | 1,410,434 |   |
| Facility management        |   | —                                       |       | 690,796                                    |   | — |   | 1,376,114 |   |
| Other                      |   | 278,859                                      |       | —                                     |   | 581,968 |   | — |   |
| Inter-segment  elimination |   | (53,227                                      | )          | —                                     |   | (124,530 | ) | — |   |
|                       |   |                                         |       |                                       |   |   |   |   |   |
| Total revenue              |   | $                                            | 10,314,192 |                                       | $      | 10,332,382 |   | $ | 19,164,427 |   | $ | 19,782,031 |   |

 

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|                               |   | **(Unaudited)  Three Months Ended  June 30** |      | **(Unaudited)  Six Months Ended  June 30** |   |
|------------------------------------|--------|----------------------------------------------|-----------|--------------------------------------------|--------|
|                               |   | **2002**                                     |      | **2001**                                   |   | **2002** |   | **2001** |   |
| Income  before taxes:              |   |                                         |      |                                       |   |   |   |   |   |
| Reprographics                      |   | $                                            | 1,244,461 |                                       | $      | 1,528,137 |   | $ | 1,908,528 |   | $ | 2,328,903 |   |
| Imaging                            |   | 1,391,939                                    |      | 804,909                                    |   | 2,390,409 |   | 1,716,305 |   |
| Digital printing                   |   | (100,813                                     | )         | (214,338                                   | )      | (85,708 | ) | (474,120 | ) |
| Facility management                |   | —                                       |      | 70,355                                     |   | — |   | 178,606 |   |
| Other                              |   | 14,623                                       |      | —                                     |   | 122,873 |   | — |   |
| Corporate  administrative expenses |   | (1,643,736                                   | )         | (1,424,730                                 | )      | (3,321,721 | ) | (2,543,181 | ) |
|                               |   |                                         |      |                                       |   |   |   |   |   |
| Total income before  taxes         |   | $                                            | 906,474   |                                       | $      | 764,333 |   | $ | 1,014,381 |   | $ | 1,206,513 |   |

 

 

**Item2.  Management’s Discussion and Analysisof 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 and Washington, D.C. metropolitan areas, and alsoserves clients on the West Coast through its Tempe, Arizona facility.  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 have also begun to provide ourservices on the West Coast of the United States through our facility in Tempe,Arizona, which began operations in October 2001.  We also provide commercial printing services utilizing digitalprinting technology in our facilities in the Washington, D.C. area.

 

On-Site was originallyincorporated in Virginia in December 1992, and changed its state ofincorporation 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 thanstatements of historical fact, including statements regarding industryprospects, plans for future expansion and other business development activitiesas well as future results of operations or financial position and the effectsof competition are forward looking. Such forward-looking information is subject to changes and variationswhich are not reasonably predictable and which could significantly affectfuture results.  Accordingly, suchresults may differ from those expressed in any forward-looking statements madeby or on behalf of the Company.  Therisks and uncertainties that could significantly affect future results include,but are not 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

 

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and uncertainties, along with the following discussion, describe some,but not all, of the factors that could cause actual results to differsignificantly from management’s expectations.

 

**Critical Accounting Policies andJudgments**

 

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 and resultsof operations, and which require the Company to make its most difficult andsubjective judgments, often as a result of the need to make estimates ofmatters that are inherently uncertain. Based on this definition, we have identified the critical accountingpolicies and judgments addressed below. Although we believe that our estimates and assumptions are reasonable,they are based upon information presently available.  Actual results may differ significantly from these estimatesunder different assumptions or conditions.

 

**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 estimatedusing historical experience.

 

For services that are completed but not delivered to the end customers,no revenue is recognized and the associated costs, estimated based on averageunit costs, are inventoried accordingly. Such costs are included in results of operation during the same periodwhen the related products 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 June 30, 2002 is adequate.  However, no assurances can be given that actual write-offs willnot 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-

 

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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 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 net bookvalue were to exceed the Company’s market capitalization, the excess carryingamount of goodwill would be written off as an impairment-related charge.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.

 

**Accounting for Derivative Instrumentand Hedging Activity**

 

The Company uses an interest rate swap to convert its variable-rateinterest payments on its mortgage ($5,514,633 at June 30, 2002) to fixed-ratepayments. This interest rate swap has been designated and qualifies as acash-flow hedge under SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities.”

 

SFAS No.133 requires that the Company 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 Comprehensive Income(Loss) until the hedged transaction occurs and is recognized in earnings.  The Company has determined that its interestrate swap was highly effective from the inception of the swap in December 2000through June 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 six months ended June 30, 2002, the Companyrecorded a non-current liability of $626,114, which represented the estimated fairvalue of the interest rate swap along with an unrealized after-tax loss of$378,110 in Other Comprehensive Loss, which is a component of the Stockholders’Equity.

 

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**Long-lived Assets**

 

Long-lived assets (primarily fixed assets of the Company) are reviewedfor impairment whenever events or changes in circumstances indicate 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 measures fair value based on quoted market prices,discounted estimates of future cash flows or other methods. For the six monthsended June 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 June 30, 2002, 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, 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**

 

**Threeand Six Months Ended June 30, 2002 Compared With Three and Six Months EndedJune 30, 2001**

 

**REVENUE**

 

Revenue for the three months endedJune 30, 2002 decreased by $18,190, to $10,314,192 from $10,332,382 in thecomparable period in 2001.  Revenue forthe six months ended June 30, 2002 decreased by $617,604 to $19,164,427 from$19,782,031 in the comparable period in 2001.

 

As compared to the comparable periodsfor 2001, revenues in the Company’s Reprographic division for the three and sixmonths ended June 30, 2002, decreased $1,019,492 and $1,922,018,respectively.  This decrease was offsetby an increase in revenue from the Company’s Imaging division of $1,360,671 and$1,948,739 and from the Company’s Digital Printing division of $105,795 and$274,351, as compared to the three and six months ended June 30, 2001. Revenueswere also negatively affected by approximately $411,937 and $794,146,respectively as a result of the Company terminating several facilitiesmanagement contracts during the first quarter of 2002.

 

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The Company generates a largepercentage of its revenue from law firms, which typically engage in largetransactional matters involving business combinations. As a result of a weakeconomy, which in turn resulted in a significantly lower level of merger andacquisition activities, the Company experienced a lower than expected amount ofrevenue in its reprographic and imaging divisions.  The Company does not expect this trend to continue and has seenan improvement in the number of large transactions occurring in themarketplace. In addition, the Company, in order to lessen its dependence on lawfirms, is actively pursuing other sources of revenue, including other marketsegments such as government, healthcare, insurance and Fortune 1000organizations in general.

 

Detail revenue by reporting segmentis included in the Notes to Financials Statements in this quarterly report onForm 10Q.

 

**COST OF SALES**

 

Cost of sales includes expensesrelated to compensation and benefits to employees, occupancy costs, equipmentcosts including depreciation, supplies, and other costs, which are directlyrelated to providing goods and services to our clients. As a percentage ofrevenue, cost of sales for the three months ended June 30, 2002, as compared tothe comparable period in 2001, decreased from approximately 64% toapproximately 55%.  As a percentage ofrevenue, cost of sales for the six months ended June 30, 2002, as compared tothe comparable period in 2001, decreased from approximately 66% toapproximately 58%.  The decrease isprimarily attributable to more effective labor management whereby the Companyincreased its utilization of part-time workers as opposed to full-time workers,in handling higher demand periods.  Inaddition to effective labor management, the Company experienced lower levels ofcost of sales in its Imaging Services division, due to the implementation ofinternally developed software applications that automatically format and printemails, attachments, and other file types. These applications continue to be improved and have enabled the Companyto replace certain labor-intensive processes with faster and more efficientautomated processing.

 

**SALES AND MARKETING EXPENSES**

 

Sales and marketing expenses for the three months ended June30, 2002, as a percentage of revenue, increased to approximately 13% fromapproximately 9% in the comparable period in 2001.  For the six months ended June 30, 2002, sales and marketingexpense, as a percentage of revenue, increased to approximately 12% fromapproximately 9% in the comparable period in 2001.  Sales and marketing expenses primarily consists of salescommissions, salaries and related costs, travel and entertainment, and othercosts related to our sales staff. Selling expense fluctuates with the number of  “house” account sales, on which no commissions are paid, and“commissioned” accounts on which sales commissions are paid.  In addition to hiring six new accountexecutives and three national sales representatives since January 1, 2002, theCompany experienced higher commission expense for the three and six monthsended June 30, 2002 as a result of a greater number of commissioned accountscompared to house accounts, for the three and six months ended June 30, 2001.

 

**GENERAL AND ADMINISTRATIVE EXPENSES**

 

General and administrative expense for the three months endedJune 30, 2002 was $2,182,125 compared to $1,652,773 in the comparable period in2001, an increase of approximately $529,352. General and administrative expense for the six months ended June 30,2002 was $4,161,572 compared to $3,074,777 in the comparable period in 2001, anincrease of approximately $1,086,795.

 

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Significantfactors that contributed to the increased expense for the three and six monthsended June 30, 2002 include the following:

 

Approximately$67,600 and approximately $260,000 of the increase for the three and six monthsended June 30, 2002 respectively, compared to the three and six months endedJune 30, 2001, is due to higher administrative salaries as a result of hiringseveral employees in the Company’s executive, human resources, accounting, andinformation technology departments.

 

Approximately$109,600 and $188,600 of the increase for the three and six months ended June30, 2002 respectively, compared to the three and six months ended June 30,2001, is due to an increase in bonuses awarded to divisional managers.  Effective January 1, 2002, the Companyadopted a new bonus plan designed to award employees for meeting certain goalsand expectations.

 

Approximately$91,400 and $175,100 of the increase for the three and six months ended June30, 2002 respectively, compared to the three and six months ended June 30, 2001is due to an increase in depreciation costs related to the purchase of computerand other information technology equipment, office equipment, and capitalimprovements made to our corporate headquarters.

 

Approximately$109,000 and $273,000 of the increase for the three and six months ended June30, 2002 respectively, compared to the three and six months ended June 30, 2001is related to various office expenses and outside services.  Office expenses include cost incurred tomove the Company’s corporate headquarters and Virginia production center to itsnew location in Alexandria, Virginia, and costs incurred to make improvementsto the new location.  The Companycompleted the move in January of 2002, and improvements to the building arecontinuing. Included in outside service expenses, are costs related toplacement fees for management level employees.

 

**OTHER INCOME AND EXPENSE**

 

Other income forthe three months ended June 30, 2002 was $15,922 compared to $81,211 in thecomparable period in 2001, a decrease of $65,289.  Other income for the six months ended June 30, 2002 decreased$96,348 as compared to the six months ended June 30, 2001.  The higher income in the three and six monthperiods in 2001 was attributable to rental income generated from sublettingportions of the property purchased by the Company in Alexandria, VA.  During the three and six month periods in 2002,as a result of occupying the property for its corporate headquarters andVirginia production center in January of 2002, the Company did not recognizesignificant amounts of rental income, which was previously derived fromsubletting certain portions of the property. The Company currently has onetenant whose lease expires in March of 2003.

 

Interest expense for the three months ended June 30, 2002 totaled$219,528 compared to $330,523 for the comparable period in 2001, a decrease of$110,995.  Interest expense for the six months ended June 30, 2001decreased $235,086 as compared to the six months ended June 30, 2001.  The decrease is due to reduced overallmarket rates of interest related to borrowings under credit agreements andcertain other current debt, lower utilization of the Company’s line of credit,and the expiration of financing arrangements for equipment and vehicles. TheCompany’s line of credit balance as of June 30, 2002 was $4,441,244 compared to$5,050,651 as of June 30, 2001.

 

Other expense for the three months ended June 30, 2002 decreased by$91,584 to $19,656 from $111,240 in the comparable period in 2001.  Otherexpense for the six months ended June 30, 2002

 

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decreased by $149,457 as compared to the six months ended June 30,2001.  Other expense includes lossesincurred as a result of disposal of certain non-performing assets for the sixmonths ended June 30, 2002 and in the comparable period in 2001 includedexpenses related to the maintenance of the Alexandria, VA property, which isnow used as the Company’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 ofJune 30, 2002. The line of credit is subject to eligible accountsreceivable.  The Company has the availability to borrow, at any giventime, the lesser of the established line of credit or eligible accountsreceivable, generally defined as 75% of accounts receivable that are less than120 days old.  The working capital line of credit bears interest at thelesser of the bank’s prime rate of interest or the 30-day LIBOR rate plus2.20%. The line of credit, which expires May 31, 2003, is subject to certainfinancial covenants; the most significant requires the Company to maintain aminimum Net Tangible Worth, as defined in the related debt agreements, of$6,000,000.  At June 30, 2002 total borrowings of  $4,441,244 were outstanding under theagreement.  The Net Tangible Worth as of June 30, 2002 was  $9,660,601. The Company met all its financial covenants as of June 30, 2002 andexpects to remain in compliance with the covenants for the rest of the year.

 

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 addition, we have obtained financing for certain equipment in theaggregate amount of approximately $2,500,000 as of June 30, 2002.  Thenotes are secured by the equipment and accrue interest at rates ranging from4.34% 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.

 

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The following summarizes, as of June 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.

 
|                                             |   | **Payments Due by Period** |   |
|--------------------------------------------------|--------|----------------------------|--------|
| **Contractual Obligations**                      |   | **Total**                  |   | **Less than  1 Year** |   | **1-3  Years** |   | **4-5  Years** |   | **After 5  Years** |   |
| Line of Credit                                   |   | 4,441,244                  |   | 4,441,244 |   | — |   | — |   | — |   |
| Building  Mortgage                               |   | 8,026,935                  |   | 725,940 |   | 1,451,880 |   | 1,451,880 |   | 4,397,235 |   |
| Long-Term Debt                                   |   | 1,994,914                  |   | 814,713 |   | 784,822 |   | 395,378 |   | - |   |
| Capital Lease  Obligations                       |   | 212,392                    |   | 148,472 |   | 63,920 |   | — |   | — |   |
| Operating Lease,  Rental & Lease Commitments |   | 7,091,435                  |   | 1,971,023 |   | 3,039,653 |   | 1,475,386 |   | 605,373 |   |
| Other Long-Term  Obligations                     |   | 233,333                    |   | 233,333 |   | — |   | — |   | — |   |
| Total  Contractual Cash Obligations              |   | 22,000,252                 |   | 8,334,725 |   | 5,340,276 |   | 3,322,644 |   | 5,002,608 |   |

 

**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 businesscombinations initiated after June 30, 2001 be accounted for using the purchasemethod of accounting, and broadens the criteria for recording intangible assetsseparate from goodwill.  Recordedgoodwill and intangibles will be evaluated against these new criteria and mayresult in certain intangibles being reclassified into goodwill, oralternatively, amounts initially recorded as goodwill may be separatelyidentified and recognized apart from goodwill. SFAS No. 142 requires the use ofa non-amortization approach to account for purchased goodwill and certainintangibles.  Under a non-amortizationapproach, goodwill and certain intangibles will not be amortized into resultsof operations, but instead would be reviewed for impairment and written down andcharged to results of operations only in the periods in which the recordedvalue of goodwill and certain intangibles is more than its fair value.  The provisions of the two statements thatapply to goodwill were adopted by the Company on January 1, 2002. The adoptionof the standards on January 1, 2002 did not have a material impact on theCompany’s financial statements.

 

In August 2001, SFAS No. 143, “Accounting for Asset RetirementObligations”, was issued. This statement significantly changes the method ofaccruing for costs that an entity is legally obligated to incur in associationwith the retirement of fixed assets. The Company will evaluate the impact andtiming of implementing SFAS No. 143, which is required no later than January 1,2003.  The Company does not expect amaterial impact to its financial statements from the adoption of SFAS No. 143.

 

The FASB also recently issued SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets,” that isapplicable to financial statements issued for fiscal years beginning afterDecember 15, 2001. The FASB’s new rules on asset impairment supersede SFAS No.121, “Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to Be Disposed Of,” and portions of Accounting Principles BulletinOpinion 30, “Reporting the Results of Operations.” This Standard provides asingle accounting model for long-lived assets to be disposed of andsignificantly changes the criteria that would have to be met to classify anasset as held-for-sale. Classification as held-for-sale is an

 

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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.

 

**Item 3.    Quantitative and Qualitative Disclosuresabout Market Risk**

 

We believe our primarymarket risk exposure with regard to our financial instruments is limited tochanges in interest rates. Based upon the composition of our variable rate debtoutstanding at June 30, 2002, we do not believe that a hypothetical increase inthe bank’s prime rate of interest or the 30-day LIBOR rate would be material tonet 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 the unpredictabilityof interests rates and seeks to reduce the potentially adverse effects that thevolatility of these rates may have on its future cash flows.  The Company maintains an interest rate riskmanagement strategy that uses a derivative instrument to minimize significant,unanticipated earnings fluctuations that may arise from volatility in interestrates.

 

By using a derivative financial instrument to hedge exposures tochanges in 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 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 anddegree of market risk that may be undertaken.

 

**PartII.  Other Information**

 

**Item1.    Legal Proceedings**

 

None.

 

**Item2.    Changes in Securities and Use ofProceeds**

 

None.

 

**Item3.    Defaults Upon Senior Securities**

 

None.

 

19

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**Item4.    Submission of Matters to a Vote ofSecurity Holders**

 

(a)     The annualmeeting of Share Owners of On-Site Sourcing, Inc. was held on April 30, 2002.

 

(b)     All directornominees were elected.

 

(c)     Certainmatters voted upon at the meeting and the votes cast with respect to suchmatters are as follows:

 

**Proposalsand Vote Tabulations**
|                                                         |   | **Votes  Cast** |   |
|--------------------------------------------------------------|--------|-----------------|--------|
| **Management  Proposals**                                    |   | **For**         |   | **Against** |   | **Abstain** |   |
|                                                         |   |            |   |   |   |   |   |
| Approval of the appointment of independent auditors for 2002 |   | 4,288,907       |   | 5,300 |   | 375 |   |

 

**Election ofDirectors**

 
| **Director**          |   | **Votes  Received** |   | **Votes  Withheld** |   |
|-----------------------|--------|---------------------|--------|---------------------|--------|
|                  |   |                |   |                |   |
| Christopher J. Weiler |   | 4,286,757           |   | 7,825               |   |
| Denis Seynhaeve       |   | 4,291,957           |   | 2,625               |   |
| Jorge R. Forgues      |   | 4,291,957           |   | 2,625               |   |
| Clifford Kendall      |   | 4,276,057           |   | 18,525              |   |
| Michael D. Brant      |   | 4,291,957           |   | 2,625               |   |
| Michael Meyer         |   | 4,276,057           |   | 18,525              |   |
| Robert W. Pivik       |   | 4,291,957           |   | 2,625               |   |

 

**Item5.    Other Information**

 

None

 

**Item6.    Exhibits and Reports**

 
| (A)    |   | EXHIBITS                                                                                                                                                                                   |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                       |
|   |   | Exhibit 10.19 Certication  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                       |
|   |   |                                                                                                                                                                                       |
|   |   | Exhibit  10.20 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                |
|   |   |                                                                                                                                                                                       |
|   |   | Exhibit 10.21 Second  Modification of Amended and Restated Revolving Line of Credit, Loan  Agreement, Term Loans Agreement and Security Agreement. Dated May 23, 2002  with Wachovia Bank. |
|   |   |                                                                                                                                                                                       |
|   |   | Exhibit 10.22 First  Modification of Amended and Restated Revolving Note. Dated May 23, 2002 with  Wachovia Bank.                                                                          |
|   |   |                                                                                                                                                                                       |
| (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)                                              |   |
|            |   |                                                      |   |
|            |   |                                                      |   |
| August 14, 2002 |   | /s/ Jason Parikh                                          |   |
| Date            |   | Jason Parikn                                              |   |
|            |   | Chief Financial Officer                                   |   |
|            |   | (Duly Authorized Officer and Principal Financial Officer) |   |

 

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