U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the year ended December 31, 2000
Commission file number 0-24982
ON-SITE SOURCING, INC.
(EXACT NAME OF THE REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
54-1648470
(I.R.S. EMPLOYER IDENTIFICATION NO.)
1111 North 19th Street, Sixth Floor
Arlington, Virginia 22209
703-276-1123
(ADDRESS AND TELEPHONE NUMBER OF THE REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
Units comprised of two shares of Common
Stock and one Common Stock Purchase Warrant
Common Stock, $.01 par value
Common Stock Purchase Warrants
Indicated by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. /X/
At March 30, 2001 the registrant had 4,943,625 shares of common
stock (the "Common Stock") outstanding, and the aggregate market value of the
Common Stock held by non-affiliates of the registrant was approximately
$6,563,563. The aggregate market value was determined based on the closing
price of the Common Stock on the NASDAQ Small Cap Market on March 30, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for 2001 Annual Meeting of the
Registrant which will be filed with the Commission within 120 days after the
close of the fiscal year are incorporated by reference into Part III.
ON-SITE SOURCING, INC.
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1. Business...............................................................................................1
Item 2. Properties.............................................................................................6
Item 3. Legal Proceedings......................................................................................7
Item 4. Submission of Matters to a Vote of Security Holders....................................................7
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..................................7
Item 6. Selected Financial Data................................................................................8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................................17
Item 8. Financial Statements..................................................................................17
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................17
PART III
Item 10. Directors and Executive Officers of the Registrant....................................................17
Item 11. Executive Compensation................................................................................17
Item 12. Security Ownership of Certain Beneficial Owners and Management........................................17
Item 13. Certain Relationships and Related Transactions........................................................17
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................18
2
PART I
This Report contains certain forward-looking statements such as our intentions,
hopes, beliefs, expectations, strategies, predictions or any other variation
thereof of our future activities or other future events or conditions within the
meaning of Section 27A of the Securities Act of 1993, as amended (the "Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby. Investors are
cautioned that all forward-looking statements involve risks and uncertainty,
including, without limitation, the factors identified in Part II, Item 7 on this
report. Although we believe that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions could be
inaccurate, and, therefore, there can be no assurance that the forward-looking
statements included in this Report will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by us or any other person that our objectives and plans will be
achieved.
ITEM 1. BUSINESS.
GENERAL
On-Site Sourcing, Inc. serves the greater Washington D.C., Baltimore,
Philadelphia, New York City and Atlanta metropolitan areas through locations in
Arlington, Virginia; Baltimore, Maryland; Gaithersburg, Maryland, Philadelphia,
Pennsylvania; New York, New York; and Atlanta, Georgia. The Arlington, Virginia
outsourcing location is one of the largest processing centers in the
metropolitan Washington, D.C. area. The Company was originally incorporated in
Virginia in December 1992 and changed its state of incorporation to Delaware in
January 1996. The Company's executive offices are located at 1111 North 19th
Street, Sixth Floor, Arlington, Virginia, 22209 and its telephone number is
(703) 276-1123. The Company's Common Stock trades on The NASDAQ Small Cap
Market-SM- under the symbol "ONSS."
On-Site Sourcing, Inc. ("On-Site", "the Company", "we", "us", or "our")
provides various outsourcing services related to documents, data, and office
management. Our target clients generate large volumes of documents and
information that require specialized processing, distribution, storage, and
retrieval of these documents and related information they contain. Typical
customers include law firms, corporations, non profit organizations,
accounting firms, financial institutions and other organizations throughout
the East Coast of the United States. During 2000, the Company, as a result of
two strategic acquisitions, began providing commercial printing services
utilizing digital printing technology.
We supply a broad range of services to the legal industry. Litigation often
involves the production and management of large numbers documents, extracted
in their original working form from the offices, files and computers of
litigating parties and their experts, advisors and legal counsel. Legal
services that we provide include managing the logistics of high volume
document production, electronic imaging, document coding, computer indexing,
automated document retrieval and high speed, and multiple-set reproduction of
documents.
Recent Developments:
During 2000, the Company made two acquisitions in order to diversify and
strengthen its business model. The acquisitions enable the Company to provide
full color digital printing and graphic services to both existing and new
customers. Terms of the acquisitions are disclosed in "Item 7 - Liquidity and
Capital Resources" and Note 1 of Notes to Financial Statements included in
this Form 10-K.
During 2000, the Company complemented its Virginia Imaging Services Division
by establishing another Imaging Services division in New York, and reopened its
Imaging Services division in Atlanta, Georgia. The Company is positioning
itself to handle the shift from traditional document management to a more
modern approach of document management, utilizing digital and web-based
technologies.
In May 2000, the Board of Directors elected Charles Millar as Chairman of the
Board. Mr. Millar replaced Christopher Weiler, President & CEO of On-Site.
Also during May 2000, the Company replaced Alfred Duncan, the Company's Chief
Financial Officer, with Jason Parikh who was previously the Company's
corporate controller.
3
In July 2000, the Company signed a definitive merger agreement with U.S.
Technologies Inc. pursuant to which U.S. Technologies will acquire the
Company. On April 2, 2001 the Company terminated the agreement with U.S.
Technologies pursuant to its right to terminate the agreement if the average
stock price of U.S. Technologies Common Stock during the twenty trading-day
period ending three full trading-days before the close of the merger is below
$0.67. Additional information regarding this merger can found in "Item 7 -
Liquidity and Capital Resources", and Note 15 of Notes to Financial
Statements included in this Annual Report on Form 10-K and on Form 8Ks
incorporated herein by reference.
STRATEGY.
Our goal is to become a national provider of document management and printing
services. To achieve this goal the Company will implement a focused business
strategy having the following elements:
o Cross-sell services to customers;
o Develop and offer web based applications that allow customers to access
and store documents efficiently and securely over the Internet;
o Diversify our product offerings;
o Implement current solutions to new markets and industries;
o Increase productivity through the use of internal applications;
o Make strategic acquisitions to deepen our base in a particular
geographic location or which will
complement our existing capabilities;
o Invest in new technology; and
o Continue to develop new proprietary processes to achieve our goal of
being a leader in e-based document management.
SEGMENTS AND SERVICES OFFERED
The current services that we provide include the following segments:
reprographics, imaging services, facilities management, and printing services.
Reprographics involves the copying and management of large amounts of
documents extracted in their original format, from the offices and files of
our customers. Our reprographic services include copying, binding, drilling,
"Bates" stamping, labeling, collating, assembling and quality review. Our
reprographic centers, currently located in Virginia, New York, Pennsylvania,
and Georgia, are open 24 hours a day, seven days a week to handle the prompt
turn around time often requested by our customers. A typical job ranges in
size from single documents with a small number of pages to multiple sets of
documents, which can exceed a million pages. A job is typically picked up by
our in-house dispatch service and brought back to our production center. The
jobs are then processed per 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 the number of copies and the level of difficulty in copying
the original documents. Each of our reprographic centers are staffed with
in-house technicians which service our copiers in event they need repairs.
Imaging services involves the conversion or transfer of traditional paper
based and electronic based documents into electronic media or vice versa.
Services provided in our Imaging Services Division primarily cater to law
firms and their clients. A typical job involves a law firm that is
representing a client in a litigation matter. In order for the law firm to
prepare for its case it often must review a large number of documents,
emails, and email attachments. As a result, the law firms often have a need
to search and retrieve appropriate documents in a timely and efficient
matter. In order to help meet this need, our Imaging Services Division offers
case management consulting, electronic scanning of documents converting email
and attachments to images, indexing/coding, optical character recognition
(OCR), electronic discovery, blowback printing, training, technical support
and electronic document search and retrieval services. Imaging services are
typically billed on a job-by-job basis, based on the number of images and
complexity of the retrieval applications.
Facilities management services allow companies to out-source certain,
non-core business, back-office functions. Our target clients include
companies that require a large amount of people, equipment and other
resources to manage their back office requirements. Based on an analysis of
our client's needs, we place our employees and equipment at the customer's
premises. The particular customer's internal processes dictate the services
we provide. Services we currently provide include copy room management,
mailroom administration, facsimile management, supply room management, and
maintenance of office equipment. At each of our facilities management
locations we utilize SiteTrax, our proprietary software. SiteTrax tracks
information related to copy, mail, fax, shipping and courier, materials
usage, and hours worked. It also provides integrated cost accounting and
invoicing information for our customers and helps them allocate expenses
accordingly. Facilities management contracts, which are billed on a monthly
basis, include a monthly base charge plus fees for any additional services
provided.
Printing services include both black and white and color digital production of
catalogs, brochures, postcards, stationary, direct mail, newsletters, and
exhibit materials. Our target customers, for these services include our
existing customers and other organizations requiring print media. In
addition, we also provide ancillary services, which include graphic design,
mailing, special finishing, storage, fulfillment, and delivery services.
Printing jobs are typically billed on a job-by-job basis depending on several
factors, including quantity, number of colors, quality of paper, and graphic
design time.
CUSTOMERS
Our customers include law firms, non-profit organizations, corporations,
accounting and consulting firms, financial institutions and other
organizations throughout the East Coast of the United States. Our clients
include many of the
4
largest law firms and business entities in the markets served. In the most
recent fiscal year, no single customer accounted for more than 10% of the
Company's revenues.
COMPETITION
The Company operates in a highly competitive environment. A significant
source of competition is the in-house document handling capability of our
targeted client base. There are also a number of companies with significant
financial resources, which compete with On-Site to provide similar products
and services in each of the markets served by On-Site. We compete primarily
on the basis of technology, performance, price, quality, reliability,
distribution, customer service and support. In order to remain competitive,
we must offer new products and services, periodically enhance our existing
products and services and compete effectively on the basis of the factors
listed above. The Company's success in its future performance is largely
dependent upon its ability to compete successfully in its currently served
markets and to expand into additional product and services. The Company's
major competitors include, but no limited to, Ikon Office Solutions Inc.,
Pitney Bowes Management Services, Inc., Xerox Business Services, and F.Y.I.
Incorporated.
SALES AND MARKETING
Our customer loyalty is built on our ability to form strong working
relationships with the people they serve in the market place and our ability
to deliver consistently superior services and support. Our sales force is
composed of approximately 30 individuals, including sales managers, account
executives, or sales assistants. The model uses a three-tiered approach for
deploying effective sales coverage in our geographic areas. The account
representatives act as primary client contacts supported by sales managers on
larger, more involved jobs. The sales assistants act as assistants to the
account representatives in day-to-day matters and facilitate interaction
between the client and our production departments. This approach provides the
Company an excellent training ground to train and develop qualified account
representatives. Many of our sales assistants move on to become account
representatives.
As a result of the acquisition of Legend Lithographics in 2000 as described
in Note 1 of the Notes to the Financial Statements included in the Annual
Report on Form 10-K, the Company intends on using the new digital printing
opportunities to create and implement a new marketing strategy. Details of
the new marketing strategy are currently under development. The goal of the
marketing strategy will be to create awareness to both existing and new
clients, highlighting the range and level of services we provide. The Company
plans to begin implementing the new marketing initiatives during 2001.
TECHNOLOGY AND PROPRIETARY INFORMATION
The Company developed the SiteTrax software platform to automate the document
and facilities management process. SiteTrax manages every step of the
production and management process, from logging in projects, tracking them
through production, quality control, shipping and delivery. SiteTrax tracks
mail, fax, courier, and box distribution, materials usage, operator
distribution/ workflow, productivity and quality control efficiency. It also
provides integrated cost accounting and invoicing. The software enhances the
efficiency and productivity of our production and management process.
During 1999, we received a U.S. patent for our real-time invoicing and
productivity analysis technology. The proprietary process, which is called
Costrax, enables us to automate certain billing and job tracking functions and
improve document management capability for our customers. The system networks
copy machines and tracks the number of copies made, the client to be billed, the
specific matter involved and the employee making the copies. This system is
designed to increase our appeal to potential clients based on price and
performance. The patent expires October 21, 2017.
During 2000, we developed programs to replace certain routine manual
functions relating primarily to our Imaging Services Division, with faster
more efficient automated processes. Attributes of the system include the
ability to organize, print, and search electronic documents using un-attended
workstations controlled by a centralized database server. These scalable
programs can convert large quantities of electronic documents, email, and
email attachments to various electronic image formats or send them directly
to high-speed printers. These systems work with existing
commercial-off-the-shelf products, used by our clients. Used mainly in our
Imaging Services Division, these programs, have helped us to reduce overhead,
lower our employee count, increase production capacity and increase our
profit margins.
Another system in developed in 2000, provides web-based access to document
databases. This system allows our clients the ability search through large
amount of documents via a web based search engine. The interfaces are easily
customizable to meet client project and data requirements. The Company can
provide this system as an extra added value service to clients after data and
documents have been processed by our Imaging Services Division. This system
is currently in the refinement phase, with one of our larger clients
currently utilizing the service. As this system is fully implemented, the
Company expects to create additional sources of revenue through this service
and the related storage and printing of electronic data and images
ENVIRONMENTAL CONDITIONS
5
The Company is not aware of any environmental conditions that would be likely to
have a material adverse effect on the business, financial condition or results
of operations of the Company. However, there can be no assurance that
environmental liabilities in the future will not have a material adverse effect
on the business, financial condition or results of operations of the Company.
EMPLOYEES
We continuously recruit, train and offer benefits and other incentives to
personnel in order to develop and retain a qualified and reliable staff. Under
our training program, all personnel receive training covering the use and
maintenance of equipment, interpersonal skills and operating procedures. We
place a strong emphasis on employee relations and engage in team building, and
employee empowerment practices, as well as providing incentives, including a
stock option plan, that are specifically designed to encourage and reward
employee performance. Additionally, employees sign confidentiality agreements
and agree to undergo drug tests. We believe these programs result in higher
employee productivity and professionalism. As of December 31, 2000, the Company
had approximately 877 employees, of which 479 were part-time employees. None of
our employees are represented by a labor union and we consider our employee
relations to be good.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information concerning the Company's
executive officers:
Name Age Served Since Position(s) Held
---- --- ------------ ----------------
Christopher Weiler 38 1992 President and Chief Executive Officer
Jason Parikh 30 2000 Chief Financial Officer
John Sabanosh 50 1998 Vice President, Operations
Allen Outlaw 35 1992 Executive Vice President, Marketing
CHRISTOPHER WEILER founded On-Site Sourcing In December 1992 and has been
President, Chief Executive Officer and a director since that time. Mr. Weiler
graduated from the United States Naval Academy in 1985 and served in the United
States Navy as a surface warfare officer and as a Navy Senate Liaison Officer on
Capitol Hill, Washington, D.C., and has worked for Pitney Bowes Management
Services.
JASON PARIKH has been Chief Financial Officer and Secretary since May of
2000. Prior to that he served as Controller of Onsite from July 1997 to May
of 2000. From 1994 until 1997 he was controller of Shirt Explosion Inc., a
clothing manufacturer generating over $10 million in revenues, as well as an
accountant for Reznick Fedder & Silverman PC. He has a B.S. in Accounting
from the University of Maryland, and has passed the CPA exam.
JACK SABANOSH has been the Vice President of Operations since May 2000. From
June 1998 to May 2000 Mr. Sabanosh served as Vice President of Finance.
Before joining On-Site, from May 1995 to June 1998 Mr. Sabanosh was Vice
President of Phoenix International, LLC, an international trade and
investment company. From 1991 until 1995, he was General Manager of FedComp,
Inc., where he restored the software firm to profitability. He has a B.S. in
Business from Virginia Polytechnic Institute and State University.
ALLEN OUTLAW has been Executive Vice President of Marketing since September
1997. Prior thereto Mr. Outlaw served as Vice President of Sales and Marketing
since joining the Company in March 1994. Mr. Outlaw has also served on the Board
of Directors since March 1994. Prior to joining the Company, he held various
positions in the investment industry, including owner and Director of Marketing
of Justin Asset Management, a successful investment management firm from January
1991 until joining the Company.
ITEM 2. PROPERTY.
6
The Company leases facilities, totaling approximately [115,000] square feet,
in Arlington, Virginia, Baltimore, Maryland, Gaithersburg, Maryland, New York
City, New York, Philadelphia, Pennsylvania, and Atlanta, Georgia. All of
these facilities are leased and principally used for operations and general
administrative functions. The Company from time to time leases additional
space on a short-term basis to facilitate higher workloads and specific
requests from clients. The leases are for terms of 5 to 10 years and expire
from 2001 to 2008.
As of March 30, 2001, we also operated at approximately [12] client locations,
related to our facilities management contracts.
During the third quarter of 2000 the Company purchased property located in
Alexandria, Virginia. The property is approximately 112,710 square feet with
69,000 square feet available for office space. On-Site plans to move it's
corporate headquarters and Virginia production center to this new location
during December 2001. The Company has also engaged an agency to explore
various sale-lease back alternatives with respect to this property. Detailed
information regarding the purchase transaction is presented in "Item 7 -
Liquidity and Capital Resources" and Note 14 of Notes to Financial Statements
included in this Annual Report on Form 10-K.
ITEM 3. LEGAL PROCEEDINGS.
In the opinion of the Company's management, there are no legal proceedings
pending to which the Company is a party or to which any of its properties is
subject, other than ordinary, routine litigation incidental to the business
which is not expected to have a material adverse effect on the results of
operations, financial condition or cash flows of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
During the fourth quarter of the year ended December 31, 2000, no matters were
submitted to a vote of the security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK.
The following table shows the high and low closing sales prices for the
Common Stock in the NASDAQ Small Cap Market for each quarter in 1999 and 2000.
The Common Stock, Warrants and Units (comprised of two shares of Common Stock
and one Common Stock Purchase Warrant) of On-Site Sourcing, Inc. are listed
on the NASDAQ SmallCap Market and trade under the symbols "ONSS", "ONSSW" and
"ONSSU", respectively.
----------------------------------------------------------------------------------------------------
COMMON STOCK WARRANTS UNITS
====================================================================================================
Quarter Ended: HIGH LOW HIGH LOW HIGH LOW
----------------------------------------------------------------------------------------------------
March 31, 1999 2.250 1.188 0.344 0.188 5.000 3.250
----------------------------------------------------------------------------------------------------
June 30, 1999 2.438 1.406 0.313 0.188 3.625 3.125
----------------------------------------------------------------------------------------------------
September 30, 1999 1.750 1.063 0.250 0.156 3.125 3.000
----------------------------------------------------------------------------------------------------
December 31, 1999 1.656 0.969 0.250 0.125 3.000 2.125
----------------------------------------------------------------------------------------------------
March 31, 2000 5.500 1.380 2.375 0.250 13.250 2.650
----------------------------------------------------------------------------------------------------
June 30, 2000 5.000 2.810 1.688 0.813 10.875 6.750
----------------------------------------------------------------------------------------------------
September 30, 2000 3.750 2.380 0.938 0.219 7.375 5.000
----------------------------------------------------------------------------------------------------
December 31, 2000 2.940 1.380 0.375 0.063 6.125 2.750
====================================================================================================
7
DIVIDENDS
We have not declared any cash dividends on our Common Stock. We do not
anticipate paying any cash dividends on our Common Stock in the foreseeable
future and intend to retain our earnings, if any, to finance the expansion of
our business and for general corporate purposes. Any payment of future dividends
will be at the discretion of our Board of Directors.
TREASURY
During December 1999, The Company's Board of Directors authorized the Company
to repurchase up to 500,000 shares of the Company's Common Stock
During 2000 and 1999, the Company repurchased, through open market and
negotiated transactions, 88,000 and 14,300 shares of the Company's Common
Stock, respectively, at an aggregate price of $351,821 and $19,330,
respectively. Total Treasury stock held by the Company at December 31, 2000
was 113,590 shares of Common Stock.
HOLDERS
As of March 21, 2001, there were approximately 37 holders of record of the
Company's Common Stock and approximately 1,558 beneficial owners of the Common
Stock.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data of the Company. The
selected financial data presented below has been derived from the Company's
financial statements which have been audited by Reznick Fedder & Silverman
PC, as described in their report thereon, and should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Results
of Operations and the financial statements and notes included in this Annual
Report on Form 10-K.
8
YEARS ENDING DECEMBER 31,
---------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA
Revenue $ 35,489,911 $ 26,670,903 $ 25,965,723 $ 21,138,948 $9,507,666
Cost of revenue 24,457,491 19,368,458 21,713,453 15,293,617 7,003,882
--------- --------- --------- --------- ---------
Gross profit 11,032,420 7,302,445 4,252,270 5,845,331 2,503,784
Selling and marketing 3,706,762 2,703,755 2,645,776 2,401,691 1,099,037
Administrative 4,606,426 3,742,909 3,025,825 2,226,103 1,072,835
Merger Related Costs 330,807 - - - -
--------- --------- --------- --------- ---------
Earnings (loss) from operations 2,388,425 855,781 (1,419,331) 1,217,537 331,912
--------- --------- --------- --------- ---------
Other income (expense) (523,990) 123,158 (7,282) 54,718 (11,672)
--------- --------- --------- --------- ---------
Earnings (loss) before income taxes 1,864,435 978,939 (1,426,613) 1,272,255 320,240
Income tax expense (benefit) 922,022 189,000 (429,000) 551,182 75,000
--------- --------- --------- --------- ---------
Net earnings (loss) $ 942,413 $ 789,939 $ (997,613) $ 721,073 245,240
--------- --------- --------- --------- ---------
Earnings (loss) per share
Basic $ 0.19 $ 0.16 $ (0.21) $ 0.15 $ 0.07
Diluted $ 0.18 $ 0.16 $ (0.21) $ 0.15 $ 0.07
--------- --------- --------- --------- ---------
Weighted Average Shares Outstanding
Basic 4,870,825 4,838,727 4,818,220 4,794,705 3,666,010
Diluted 5,320,943 4,909,924 4,818,220 4,947,203 3,767,069
AS OF DECEMBER 31,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital $ 260,906 $ 3,496,846 $ 3,181,400 $ 4,577,446 $ 3,766,684
Total assets 28,079,231 11,649,129 10,951,210 12,239,083 8,521,545
Current Liabilities 11,501,179 3,695,246 3,326,752 3,468,759 1,083,523
Long-term Debt 8,097,810 528,687 1,169,454 1,094,444 990,683
Stockholders' equity 7,852,989 6,944,019 6,135,911 7,092,987 6,356,364
QUARTERLY RESULTS
The following table sets forth quarterly financial data as reported by the
Company on its Quarterly Reports on Form 10-Q, for year 1999 and 2000.
9
ON-SITE SOURCING, INC.
SELECTED QUARTERLY FINANCIAL DATA
UNAUDITED
March 31, June 30, Sept 30, Dec 31, March 31, June 30, Sept 30, Dec 31,
1999 1999 1999 1999 2000 2000 2000 2000
---- ---- ---- ---- ---- ---- ---- ----
Revenue 6,330,596 6,591,361 6,355,283 7,393,663 9,772,365 8,681,120 7,967,584 9,068,842
Costs and expenses
Cost of sales 4,935,789 4,956,717 4,709,173 4,766,779 5,999,605 5,793,342 6,030,322 6,634,222
--------- --------- --------- --------- --------- --------- --------- ---------
1,394,807 1,634,644 1,646,110 2,626,884 3,772,760 2,887,778 1,937,262 2,434,620
--------- --------- --------- --------- --------- --------- --------- ---------
Selling expense 495,272 574,533 647,113 986,837 910,230 984,402 625,892 1,186,238
Administrative expense 799,713 911,651 1,074,960 956,585 1,080,301 1,106,118 1,132,396 1,287,611
Merger Related Costs - - - - - - - 330,807
--------- --------- --------- --------- --------- --------- --------- ---------
1,294,985 1,486,183 1,722,073 1,943,422 1,990,531 2,090,520 1,758,288 2,804,656
--------- --------- --------- --------- --------- --------- --------- ---------
Earnings (loss) from
operations 99,822 148,461 (75,963) 683,462 1,782,229 797,258 178,974 (370,036)
Other income (expense)
Other income 23,682 43,500 690 280,182 2,335 4,304 9,503 71,909
Other expense (45,284) (46,743) (84,271) (48,599) (147,644) (60,722) (122,871) (280,804)
--------- --------- --------- --------- --------- --------- --------- ---------
(21,602) (3,243) (83,581) 231,583 (145,309) (56,418) (113,368) (208,895)
--------- --------- --------- --------- --------- --------- --------- ---------
Earnings (Loss) before income taxes 78,220 145,218 (159,544) 915,045 1,636,920 740,840 65,606 (578,931)
Income tax (benefit) expense - 189,000 652,000 294,800 25,198 (49,976)
--------- --------- --------- --------- --------- --------- --------- ---------
Net (Loss) Earnings 78,220 145,218 (159,544) 726,045 984,920 446,040 40,408 (528,955)
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. FORWARD LOOKING DISCLOSURE
GENERAL
We began to provide reprographic and facilities management services to the
premium service segment of the Philadelphia, Pennsylvania market in June
1993. We subsequently expanded our geographic market to include Washington,
DC, Gaithersburg, Maryland, New York, New York and Atlanta, Georgia. In
November 1996, we expanded the scope of our reprographic services to include
imaging and scanning. In 1998 the Company formed its Information Technology
Division to provide a full range of technology services to law firms and
other professional service organizations. During 1999, we subsequently sold
our Information Technology Division. Revenues from reprographic and imaging
services accounted for approximately 87% of total revenues, facilities
management services accounts for 9% of total revenue, and printing services
accounts for 4% of total revenues for the year ended December 31, 2000.
The revenues provided by the reprographic and imaging services vary depending on
the volume of work orders received, with the months of August and December
historically being slow periods. Revenues are collected on a monthly basis for
facilities management contracts with payment due on the first of the following
month, while reprographic and imaging and digital printing service revenues are
collected on a per job basis.
During 2000, the Company acquired a commercial printing business. Subsequent
to the acquisition, the Company invested approximately $2.8 million in
additional equipment. The equipment primarily includes digital printing
presses and related equipment. The Company believes that this investment
allows the Company to compete with many of the larger printing shops, in
terms of quality, price, volume, and turn around time.
During 2000, the Company also continued its commitment to build the Imaging
Services Division. Equipment investments totaled approximately $1.13 million
in 2000. In addition to equipment the, Company hired several information
technology individuals in order to meet the complex needs of our clients and
stay abreast of the latest technology issues.
We have implemented a growth strategy based on certain e-commerce initiatives
including the development of an interactive business-to-business web site and
investment in human resources and technology to fully integrate our future
expansion plans with technological advances in order to meet the changing needs
of our customers.
Our strategy consists of focusing on Internet-based document management services
in our four core businesses - reprographics, imaging, printing and facilities
management. Our plans include positioning ourselves to become a national
document management leader through product enhancements, development of new
technology, and formation of strategic partnerships with document management
companies and selective acquisitions in new and existing markets.
During 1999, we received a U.S. patent for Costrax, a real-time invoicing and
productivity analysis technology, which allow us to capture real-time, billable
data from our photocopier machines. The technology will integrate the data into
a web-based document management system. The system, based on state-of-the-art
shipping, tracking, billing and electronic file management systems will provide
the foundation for our Internet/web-based initiatives.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1999
Revenue
10
Our revenues are primarily derived from reprographics, imaging and related
services, printing, and facilities management services. Revenue increased
approximately 33%, from $26.67 million for the year ended December 31, 1999
to $35.49 million for the year ended December 31, 2000. The increase was due
to an increase in imaging revenues and revenues from our acquisitions
completed in the year 2000.
Imaging revenues increased 327% or $7.25 million, from $2.22 million for the
year ended December 31, 1999 to $9.47 million for the year ended December 31,
2000. The increase in imaging revenues is a result of the investment and
commitment the Company has placed in the Imaging Services Division. The
Imaging Services Division is important for the Company's future growth. As
the needs of our clients shift from the traditional reprographic document
management solutions to a more technology based solution, we expect revenues
in our imaging division to increase. The addition of our New York and Georgia
Imaging Divisions are expected to help increase imaging revenues.
Revenues of $1.85 million were achieved as a result of the acquisitions of
Legend Lithograph and Duplicating & Design Inc, which were both completed in
the year 2000. In addition, 1999 included $979,000 in revenues generated from
the Company's Information Technology division, which was sold in September
1999.
As discussed previously in this Annual Report on Form 10-K, the Company has
made significant investment in digital printing and related equipment. As the
Company fully integrates the printing division in its sales and marketing
activities and cross sells printing services to its existing clients, the
Company expects to see an increase in printing revenues.
Gross profit as a percentage of revenues increased 3.72%, from 27.37% for the
year ended December 31, 1999 to 31.09% for the year ended December 31, 2000.
The increase was due to efficiencies received as a result of higher sales
volumes and higher revenues from our imaging services division, which
contributes higher margins compared to reprographics, printing, and
facilities management.
Selling expenses, as a percentage of revenues, remained fairly constant for
the year ended December 31, 2000 compared to the year ended December 31,
1999. As a percentage of revenues, selling expense was 10.44% and 10.14% for
the years ended December 31, 2000 and 1999 respectively. Selling expense
includes commissions, salaries and related costs, travel and entertainment,
and other costs related to our sales staff.
Administrative expenses increased from $3.74 million in 1999 to $4.60 million
in 2000. The increase is due to increased administrative staffing related to
the two acquisitions completed in 2000, increased staffing in accounting and
human resources to handle the revenue growth experienced by the company,
and expenditures related to the maintenance and development of the
Company's IT infrastructure.
On April 2, 2001 the Company terminated the Merger Agreement with U.S
Technologies. As a result of the termination, the Company expensed, for the
fourth quarter of 2000, $330,807 in expenses related to merger. This amount
includes legal fees and cost associated with the preparation of a fairness
opinion directly related to the due diligence of the transaction.
Other income decreased in the year 2000 by $260,003, from $348,054 in 1999 to
$88,051 in 2000. Of the $88,051 in other income reported for 2000, approximately
$70,000 was related to rental income received as a result of subletting the
property in Alexandria, Virginia, which was purchased by the Company in 2000 for
its future headquarters and Virginia production center. The remainder of other
income, approximately $18,000, for 2000 included, miscellaneous refunds and
credits.
Other income for 1999 of $348,054 includes: a gain of $270,000 realized as a
result of the sale of the Company's IT division; insurance proceeds of
$23,000, representing proceeds on amounts previously written off; and a
$42,000 gain on the sale of copy equipment.
Other expense increased in the year 2000 by $387,145, to $612,041 compared to
$224,896 in the year 1999. Other expense for 2000 included expenses of:
$88,510 related to expenses for the Alexandria, Virginia Property purchased
by the Company for its future headquarters and Virginia production center;
$108,294 in early termination fees and the
11
write-off of certain leasehold improvements related to the Company relocating
its Atlanta, Georgia facility to a less expensive facility; and $415,236 in
interest and interest related fees.
During 1999, the Company utilized net operating loss carryforwards totaling
approximately $1,755,000, which effectively offset net taxable income. The
Company recorded a deferred tax expense for 1999 of $189,000. During 2000, the
remaining net operating loss carry forwards were not sufficient to fully offset
net taxable net income, resulting in a current tax liability of $ 583,552 and a
deferred tax liability of $338,470.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998
Revenues in 1999 of $26.67 million were 2.7% higher than 1998 revenues of $25.97
million. Reprographics revenues in 1999 were $20.25 million, almost equal to
1998 levels of $20.45 million.
Revenue from imaging services increased from $1.26 million in 1998 to $2.22
million in 1999, with the largest increase occurring during the 4th quarter of
1999 as we identified and actively pursued imaging opportunities which resulted
in an increased volume of imaging work orders fulfilled at our various
locations.
Gross profit in 1999 was $7.3 million, an increase of 72% from 1998 levels of
$4.25 million. As a percentage of revenue, 1999 gross profit was 27.37% compared
to 16.37% in 1998. Major contributions to the improvement in margins were from
the growth of the imaging division, which contributes higher margins, and the
elimination of the Information Technology division, which was sold in September
1999.
Improved cost controls implemented in 1999 and improved management of our labor
force in the reprographics operations resulted in increased efficiencies and
improved gross margins. As unprofitable contracts ended, facilities management
gross profits improved in 1999. The imaging division experienced a steady
improvement in gross profit during 1999 and the information technology division,
which continued to experience lower than expected gross profits, was divested
during the 3rd quarter of 1999.
Selling expenses, consisting predominantly of sales commissions, salaries and
related costs, travel and entertainment, and other costs related to our sales
staff, remained constant at 10.1% of sales. Administrative expenses increased
from $3.0 million in 1998 to $3.7 million in 1999. Completion of the
implementation of a financial accounting system and increased administrative
staff resources contributed to the increase in administrative expenses.
Other income increased $118,762 in 1999, from $229,292 in 1998 to $348,054 in
1999, primarily due to the sale of the information technology division in
September 1999.
Provision for income taxes of $189,000 was a result of recording deferred tax
expense. There was no current income tax expense due to a net operating loss
carryforward from prior years.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our expansion and growth by utilizing internally generated cash
flow, long term financing, and a commercial line of credit. We anticipate that
the cash flow from operations and credit facilities will be sufficient to meet
our expected cash requirements for the next twelve months. There can be no
assurances that unforeseen events may not require more working capital than we
have at our disposal.
The following summarizes the transactions that required significant cash
payments during 2000, utilizing the Company's working line of credit, and/or
financing arrangements:
PROPERTY TRANSACTION
As discussed in "Item 2 - Property", and in Note 14 of Notes to Financial
Statements included in this Annual Report on Form 10-K, the Company
purchased, property located in Alexandria, Virginia in November of 2000. The
total purchase price of
12
the property, including commissions and due diligence, was $7,478,796. The
Company incurred a cash expenditure of $1,678,796 and a related mortgage of
$5,800,000. The Company has engaged a professional real estate advisory firm
to explore sale leaseback alternatives. The Company is currently reviewing
potential offers from various investors. If the Company implements a
sale-leaseback transaction, the Company expects to receive all or a
significant portion of the original cash expenditure. The Company expects to
implement a sale-leaseback by July 31, 2001.
ACQUISITIONS
As discussed in "Item 1 - Business" and in Note 1 of Notes to Financial
Statements included in this Form 10-K, the Company made two acquisitions in
2000.
The first acquisition, of Legend Lithographic, Inc and Pseudon
Communications, Inc, which closed in April of 2000, required the Company to
pay $438,172 in consideration upon closing and assume liabilities of $231,461.
The second acquisition of Duplicating & Design Inc. required the Company to
pay $274,412 in consideration on closing of the transaction, in September of
2000. The Company is also required to make two subsequent payments of
$233,333 on each of the first and second anniversary dates thereafter.
PROPOSED MERGER WITH U.S. TECHNOLOGIES INC.
As in discussed in "Item 1 - Business" and Note 15 of Notes to Financial
Statements included in this Form 10-K, the Company is party to a definitive
merger agreement with U.S. Technologies Inc. The Company incurred expenses of
$330,807. This amount includes legal fees and costs associated with the
preparation of a fairness opinion directly related to the due diligence of
the transaction. On April 2, 2001 the Company terminated the Merger Agreement
with U.S Technologies. As a result of the termination, the Company wrote off,
for the fourth quarter of 2000, these expenses related to merger.
INVESTMENT IN FIXED ASSETS
Exclusive of the Alexandria, Virginia Property and the two acquisitions
discussed above, the Company during 2000 invested approximately $4,725,774 of
fixed assets. Of these amounts, $1,922,831 was paid for in cash and
$2,802,943 financed with various financing arrangements.
INCOME TAXES
The Company, in anticipation of higher earnings, and the effect of expensing
the of merger related costs, in the fourth quarter of 2000, the Company overpaid
state and federal income taxes by $715,674. Depending on the results of the
first quarter 2001, the Company will either apply the tax credits to year 2001
tax liabilities or request a refund from the appropriate agencies.
STOCK REPURCHASE PROGRAM.
As discussed in "Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters" the Company incurred expenditures of $351,821 related to
the repurchase of the Company's Common Stock during 2000.
At December 31, 1999, the Company had available a working capital line of
credit in the amount of $2,500,000. The line of credit is subject to eligible
accounts receivable. The Company has available, to borrow, at any given time,
the lesser of the established line of credit or eligible accounts receivable.
Eligible accounts receivable are 75% of accounts less than 120 days old.
During 2000, the line of credit was increased to $6,000,000 and subsequently
to $7,000,000 in January of 2001. The working capital line of credit bears
interest at the banks prime rate of interest or the 30-day LIBOR rate plus
2.25%. The line of credit, which expires April 30, 2001, is subject to
certain financial covenants; the most significant requires the Company to
maintain a minimum net worth of $6,000,000. Net advances made under this
agreement, as of December 31, 2000 and 1999 were $5,809,598 and $469,475
respectively. Net worth, as defined under the agreement, as of December 31,
2000 was $6,841,045.
13
In addition, we have obtained financing for certain equipment and vehicles.
The notes are secured by the equipment and vehicles, at rates ranging from 5%
to 10.25 % per annum and mature at various times between 2001 and 2008. In
May of 2000 the company obtained additional financing at comparable terms,
for certain equipment in the amount of $1,125,000. Detailed information
regarding the various financing arrangements is presented in Note 6 of Notes
to Financial Statements included in this Annual Report on Form 10-K.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. This statement
is effective for all fiscal quarters of fiscal years beginning after June 15,
2000. Adoption of SFAS No. 133 is not expected to have a material impact on the
Company's financial statement presentation or disclosures.
In April 2000, the FASB issued FASB Interpretation ("FIN") No. 44, "Accounting
for Certain Transactions Involving Stock Compensation and Interpretation of APB
No. 25", which is effective July 1, 2000, except for certain conclusions which
cover specific events after either December 15, 1998 or January 12, 2000. FIN
No. 44 clarifies the application of APB No. 25 related to modifications of stock
options, changes in grantee status, and options issued on a business
combination, among other things. The adoption of FIN No. 44 is not expected to
have a significant impact on the Company's financial position or results of
operations.
YEAR 2000 ISSUE AND COMPLIANCE
We successfully completed our program to ensure year 2000 compliance. As a
result, we have had no year 2000 problems to date that affected our business
results of operations or financial condition.
IMPACT OF INFLATION
Management does not believe that inflation has materially affected the Company's
operating results. Substantial increases in costs and expenses, particularly
food, supplies, labor and operating expenses, could have a significant impact on
the Company's operating results to the extent that such increases cannot be
passed along to customers.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We believe our market risk exposure with regard to our financial instruments is
limited to changes in interest rates. Based upon the composition of our variable
rate debt outstanding at December 31, 2000, which is primarily borrowings under
the working capital line of credit, we do not believe that a hypothetical
increase in the bank's prime rate of interest or the 30-day LIBOR rate would be
material to net income.
RISK FACTORS
The following risk factors should be carefully considered before making an
investment decision. If any of the risks actually occur, our business financial
condition or results of operations could be negatively affected, the price of
securities could decline, we may not be able to repay our debt, and you may lose
all or part of your investment. You should also refer to the other information
contained in this report and incorporated in this report by reference, including
our financial statements and related notes.
WE MAY NOT BE ABLE TO MANAGE OUR RAPID GROWTH
We cannot be sure that our management team will effectively be able to oversee
and implement our operating or growth strategies. Further, our growth will
continue to place significant demands on management and on our internal systems
and controls. We cannot assure that our management group will effectively be
able to direct us through a continued period of significant growth. In addition,
we cannot assure you that our current systems will be adequate for our future
needs or that we will be successful in implementing new systems or converting
existing systems. If we fail to implement these new systems, procedures and
controls on a timely basis, we may not be able to service our clients' needs,
hire and retain new employees, pursue new business, complete future acquisitions
or operate our business effectively. As a result of any of these problems
associated with expansion, our business, financial condition and results of
operations could be materially and adversely affected.
WE MAY NEED, BUT MAY NOT BE ABLE TO OBTAIN, ADDITIONAL FINANCING IN THE
FUTURE IN ORDER TO MEET OUR WORKING CAPITAL AND CAPITAL EXPENDITURE
REQUIREMENTS AND TO GROW OUR BUSINESS.
14
We may need to raise additional financing in the future in order to meet our
working capital and capital expenditure requirements and grow our business. We
cannot be certain that we will be able to obtain additional financing on
favorable terms, if at all, and our failure to obtain additional financing on
acceptable terms could adversely affect our operations. If we need additional
capital and cannot raise it on acceptable terms, we may not be able to acquire
additional companies, open or expand offices in the United States and abroad,
make capital expenditures, hire and train additional personnel or expand our
business.
In the event we elect and are able to obtain additional funding through equity
financing, the terms of this financing could be highly dilutive to current
shareholders. We may also attempt to obtain additional funding through debt
financings. Any debt financings may contain restrictive terms that limit our
operating flexibility. As a result, either debt or equity financing could have a
material adverse effect on our business, financial condition or results of
operations.
THE PRICE OF OUR COMMON STOCK MAY BE VOLATILE
The price of our common stock may be volatile. Our quarterly results of
operations may vary materially as a result of the timing and structure of
strategies for future growth. In addition, since a significant portion of our
revenue is generated on a project-by-project basis, the timing or completion of
material projects could result in fluctuations in our results of operations for
particular quarterly periods. Fluctuations in operating results may adversely
affect the market price of our common stock. The market price for our common
stock may also fluctuate in response to material announcements by us or our
significant clients or competitors, changes in the economic or other conditions
impacting our targeted client segments or changes in general economic
conditions. Further, the securities markets have experienced significant price
and volume fluctuations from time to time that have often been unrelated or
disproportionate to the operating performance of particular companies. These
broad fluctuations may adversely affect the market price of our common stock.
WE DEPEND ON CERTAIN CLIENT INDUSTRIES
We derive our revenue primarily from document and information intensive
industries, particularly law firms. Fundamental changes in the business
practices of any of these client industries, whether due to regulatory,
technological, the internet or other developments, could cause a material
reduction in demand by our clients for the services offered by us. Any reduction
in demand would have a material adverse effect on our results of operations. The
document and information management services industry is characterized by
technological change, evolving client needs and emerging technical standards.
Although we believe that we will be able to continue to offer services based on
the newest technologies, we cannot assure you that we will be able to obtain any
of these technologies, that we will be able to effectively implement these
technologies on a cost-effective or timely basis or that such technologies will
not render obsolete our role as a third party provider of document and
information management services.
WE FACE INTENSE COMPETITION
The document and information management services industry is highly competitive.
We cannot guarantee that we will be able to compete successfully in the future.
A significant source of competition is the in-house document handling capability
of our targeted client base. We cannot assure you that these businesses will
outsource more of their document and information management needs or that such
businesses will not bring in-house, services that they currently outsource. In
addition, certain of our competitors are larger businesses and have greater
financial resources than we do. Certain of these competitors operate in broader
geographic areas than we do, and others may choose to enter our areas of
operation in the future. In addition, we intend to enter new geographic areas
through internal growth and acquisitions and expect to encounter significant
competition from established competitors in each new area. As a result of this
highly competitive environment, we may lose clients or have difficulty in
acquiring new clients and new companies, and our results of operations may be
adversely affected. If we are forced to lower our pricing or if demand for our
services decreases our business, financial condition and results of operations
will be materially and adversely affected.
OUR ABILITY TO MEET CHANGES IN TECHNOLOGY COULD BE EXPENSIVE AND, IF WE DO NOT
15
KEEP UP WITH THESE CHANGES, WE COULD LOSE EXISTING CLIENTS AND BE UNABLE TO
ATTRACT CLIENTS
The markets for our document and information management services are subject to
rapid technological changes and rapid changes in client requirements. To
compete, we commit substantial resources to operating multiple hardware
platforms, to utilizing third-party software programs and to training client
personnel and our personnel in the use of new technologies. Future hardware,
software and other products may be able to manipulate large amounts of documents
and information more cost effectively than existing products, which we use. Our
inability to keep up with these changes could adversely affect our business and
financial results and result in us losing clients and being unable to attract
clients.
WE DEPEND ON OUR PERSONNEL
Our operations are dependent on the continued efforts of our executive officers
and on senior management of our operating companies. If any of these people are
unable or unwilling to continue in their present role, or if we are unable to
attract and retain additional managers and skilled employees, our business could
be adversely affected.
Our success depends, to a significant extent, upon our ability to attract,
retain and motivate highly skilled and qualified personnel. If we fail to
attract, train, and retain sufficient numbers of these technically skilled
people, our business, financial condition, and results of operations will be
materially and adversely affected. Competition for personnel is intense in the
document and information management services industry, and recruiting and
training personnel require substantial resources. We must continue to grow
internally by hiring and training technically skilled people in order to perform
services under our existing and future contracts. We have to pay an increasing
amount to hire and retain a skilled workforce.
WE MAY BE LIABLE FOR BREACH OF CONFIDENTIALITY
A substantial portion of our business involves the handling of documents
containing confidential and other sensitive information. Although we have
established procedures intended to prevent any unauthorized disclosure of
confidential information, we cannot assure you that unauthorized disclosures
will not result in material liability to us.
WE MAY HAVE BUSINESS INTERRUPTIONS
Certain of our operations are performed at a single location and are dependent
on continuous computer, electrical, and telephone service. As a result, any
disruption of our day-to-day operations could have a material adverse effect
upon us. We cannot assure you that a fire, flood, earthquake, power loss,
telephone service loss, problems caused by computer or technology issues or
other event affecting one or more of our facilities would not disable these
services. Any significant damage to any facility or other failure that causes
significant interruptions in our operations may not be covered by insurance. Any
uninsured or underinsured loss could have a material adverse effect on our
business, financial condition or results of operations.
MANAGEMENT EXERCISES SUBSTANTIAL CONTROL OVER OUR AFFAIRS
As of December 31, 2000, our directors and executive officers, excluding the
effect of options, owned approximately 23% of Common Stock. Our directors and
executive officers exercise substantial control over our affairs. If these
persons act together, they might be able to elect a sufficient number of
directors to control our Board of Directors and to approve or disapprove any
matter submitted to a vote of our stockholders.
WE MAY HAVE ENVIRONMENTAL LIABILITIES IN THE FUTURE
We are subject to regulations and ordinances that govern activities or
operations that may have adverse environmental effects, such as discharges to
air and water. We are not aware of any environmental conditions relating to
present or past waste generation at or from these facilities that would be
likely to have a material adverse
16
effect on our business, financial condition or results of operations. However,
we cannot assure you that environmental liabilities will not in the future have
a material adverse effect on our business, financial condition or results of
operations.
ITEM 8. FINANCIAL STATEMENTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information required by this Item will be included in the Company's Proxy
Statement for the 2001 Annual Meeting of Shareholders under the caption
"Directors and Executive Officers" which will be filed with the Securities and
Exchange Commission no later than 120 days after the close of the fiscal year
ended December 31, 2000, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be included in the Company's Proxy
Statement for the 2001 Annual Meeting of Shareholders under the caption
"Executive Compensation" which will be filed with the Securities and Exchange
Commission no later than 120 days after the close of the fiscal year ended
December 31, 2000, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item will be included in the Company's Proxy
Statement for the 2001 Annual Meeting of Shareholders under the caption
"Security Ownership of Certain Beneficial Owners and Management" which will be
filed with the Securities and Exchange Commission no later than 120 days after
the close of the fiscal year ended December 31, 2000, and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item will be included in the Company's Proxy
Statement for the 2001 Annual Meeting of Shareholders under the caption "Certain
Relationships and Related Transactions" which will be filed with the Securities
and Exchange Commission no later than 120 days after the close of the fiscal
year ended December 31, 2000, and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Lists of Documents Filed as Part of this Report
1. Financial Statements
Page
Report of Independent Auditors....................................................................................... 18
Financial Statements:
Balance Sheets as of December 31, 2000 and 1999...................................................................... 20
Statements of Operations for the Years Ended December 31, 2000, 1999 and 1998........................................ 21
17
Statements of Stockholders' Equity for the Years Ended December 31, 2000, 1999 and 1998.............................. 22
Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998........................................ 23
Notes to Financial Statements........................................................................................ 25
2. Schedules
All Schedules are omitted because the required information is inapplicable or it
is presented in the Financial Statements or the notes thereto.
3. Exhibits
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
-------------- -----------------------
3.01(1) Certificate of Incorporation: Delaware
3.02(1) Restated By-Laws: Delaware
4.01(1) Form of Common Stock Certificate
4.02(1) Form of Warrant Certificate
4.03(1) Form of Warrant Agreement between On-Site Sourcing, Inc. and the Continental Stock Transfer and
Trust Company.
4.04(1) Registrant's Articles of Incorporation are incorporated by reference to exhibit 3.01
4.05(1) Registrant's Restated Bylaws pages 1-5 are incorporated by reference to exhibit 3.02
10.01(1) Employment Agreement between the Company and Christopher Weiler
10.10(1) Lease with JRG/Lynn Associates, 9/12/95, for Arlington, VA
10.11(1) First Addendum to Lease with JRG/Lynn Associates, 3/30/94
10.12(1) Second Addendum to Lease with JRG/Lynn Associates, 7/6/94
10.13(1) Third Addendum to Lease with JRG/Lynn Associates, 6/29/95
10.14(1) Fourth Addendum to Lease with JRG/Lynn Associates, 1/25/96
10.17(1) Lease with Kingston Atlanta Partners, L.P. - 12/15/95 for Atlanta, GA
10.18(1) Form of Management Services Contract
10.19(5) Lease with 443 Company/William Real Estate Co., Inc. for New York, NY office
10.20(5) Lease with JRG/Lynn Associates 10/18/96
10.23(2) Revised 1996 Stock Option Plan
10.24(2) 1997 Stock Option Plan
18
10.26 Lease with Miller Properties.
10.27 Lease Modification with Williams Real Estate
10.28 1998 Stock Option Plan
10.29 Employment Agreement with Arne Christensen
10.30 Employment Agreement with Allen Outlaw
10.31 Employment Agreement with Alfred Duncan
10.33 Employment Agreement with Jack Sabanosh
10.34 Purchase Agreement of Alexandria, VA property
10.35 Mortgage agreement for Alexandria, VA property with First Union
10.36 Modification of Line of Credit Agreement
10.37 Lease Agreement with Laytonsville Partnership
10.38 Lease Agreement with L.A. Avenue of the Arts
10.39 Lease Agreement with Chattahouchee Warehouses LLC
10.40 Lease Agreement with GA-Met
16.01(4) Letter on change in certifying accountant
23. Accountants Consents
23.1 Consent of Reznick Fedder & Silverman P.C. *
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2 file No. 333-3544.
(2) Incorporated by reference to the Company's Post Effective Amendment to the
Company's Registration Statement on Form SB-2 file No. 333-3544.
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the period ended September 30, 1996.
(4) Incorporated by reference to the Company's Current Report on Form 8-K dated
November 29, 1996 and amended December 9, 1996.
(5) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the period ended December 31, 1996
(b) Reports on Form 8-K
On October 6, 2000, the Company filed a Current Report on Form 8-K with
the SEC to report that the Company had entered into a definitive merger
agreement with U.S. Technologies pursuant to which U.S. Technologies
will acquire the Company. The Current Report attaches as exhibits the
Agreement and Plan of Merger and related agreements
19
* Filed herewith. All other exhibits have been previously filed as indicated.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended, the Registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on this 7th day of May 2001.
BY: /s/ Christopher J. Weiler
---------------------------------
Christopher J. Weiler, President
Chief Executive Officer,
and Director
In accordance with the Securities Exchange Act of 1934, as amended, this Report
has been signed below by the following persons on behalf of the Registrant, and
in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ CHRISTOPHER J. WEILER President, Chief Executive May 7, 2001
------------------------ Officer and Director
Christopher J. Weiler
/s/ JASON PARIKH
------------------------
Jason Parikh Chief Financial Officer May 7, 2001
(Principal Financial Officer)
/s/ ALLEN OUTLAW Executive Vice President and Director May 7, 2001
------------------------
Allen Outlaw
/s/ CHARLES B. MILLAR Chairmen May 7, 2001
------------------------
Charles B. Millar
20
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
ON-SITE SOURCING, INC.
DECEMBER 31, 2000, 1999 AND 1998
On-Site Sourcing, Inc.
TABLE OF CONTENTS
PAGE
INDEPENDENT AUDITORS' REPORT 3
FINANCIAL STATEMENTS
BALANCE SHEETS 4
STATEMENTS OF OPERATIONS 5
STATEMENTS OF STOCKHOLDERS' EQUITY 6
STATEMENTS OF CASH FLOWS 7
NOTES TO FINANCIAL STATEMENTS 9
[Reznick Fedder & Silverman Letterhead]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
On-Site Sourcing, Inc.
We have audited the accompanying balance sheets of On-Site Sourcing,
Inc., as of December 31, 2000 and 1999, and the related statements of
operations, stockholders' equity and cash flows for the years ended December 31,
2000, 1999 and 1998. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of On-Site Sourcing,
Inc., as of December 31, 2000 and 1999, and the results of its operations and
its cash flows for the years ended December 31, 2000, 1999 and 1998, in
conformity with generally accepted accounting principles.
/s/ Reznick, Fedder & Silverman
Bethesda, Maryland
January 31, 2001, except for
Note 15 which is dated April 2, 2001
3
On-Site Sourcing, Inc.
BALANCE SHEETS
December 31, 2000 and 1999
2000 1999
--------------------- ---------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,428 $ 22,682
Accounts receivable, net 9,762,093 6,462,624
Prepaid supplies 677,771 502,361
Prepaid expenses 471,764 162,484
Prepaid income taxes 715,674 --
Notes receivable, current portion 131,355 41,941
------------ ------------
Total current assets 11,762,085 7,192,092
PROPERTY AND EQUIPMENT, net 15,024,026 4,104,106
OTHER ASSETS
Note receivable, net of current portion 117,753 270,000
Goodwill, net 1,011,944 --
Other assets 163,423 82,931
------------ ------------
Total assets $ 28,079,231 $ 11,649,129
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,149,926 $ 1,808,633
Accrued and other liabilities 853,986 806,858
Line of credit 5,809,598 469,475
Current portion of long-term debt 1,401,184 571,707
Deferred income taxes 286,485 38,573
------------ ------------
Total current liabilities 11,501,179 3,695,246
NONCURRENT LIABILITIES
Long-term debt, net of current portion 8,097,810 528,687
Deferred rent 189,177 133,568
Deferred income taxes 438,076 347,609
------------ ------------
Total liabilities 20,226,242 4,705,110
------------ ------------
Commitments -- --
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 20,000,000 shares
authorized; 5,057,215 and 4,851,669 shares issued outstanding 50,572 48,517
Preferred stock, $.01 par value, 1,000,000 shares
authorized, no shares issued and outstanding -- --
Subscription receivable (50,400) (50,400)
Additional paid - in capital 6,786,244 6,469,921
Treasury stock (113,590 and 25,590 shares of common stock at cost) (396,152) (44,331)
Retained earnings 1,462,725 520,312
------------ ------------
7,852,989 6,944,019
------------ ------------
Total liabilities and stockholders' equity $ 28,079,231 $ 11,649,129
============ ============
See notes to financial statements
4
On-Site Sourcing, Inc.
STATEMENTS OF OPERATIONS
Years ended December 31, 2000, 1999 and 1998
2000 1999 1998
------------------- ------------------- ------------------
Revenue $ 35,489,911 $ 26,670,903 $ 25,965,723
Cost of revenue 24,457,491 19,368,458 21,713,453
------------------- ------------------- ------------------
Gross profit 11,032,420 7,302,445 4,252,270
------------------- ------------------- ------------------
Selling and marketing 3,706,762 2,703,755 2,645,776
Administrative 4,606,426 3,742,909 3,025,825
Merger related costs 330,807 - -
------------------- ------------------- ------------------
8,643,995 6,446,664 5,671,601
------------------- ------------------- ------------------
Earnings (loss) from operations 2,388,425 855,781 (1,419,331)
------------------- ------------------- ------------------
Other income (expense)
Other income 88,051 348,054 229,292
Other expense, primarily interest (612,041) (224,896) (236,574)
------------------- ------------------- ------------------
(523,990) 123,158 (7,282)
------------------- ------------------- ------------------
Earnings (loss) before income taxes 1,864,435 978,939 (1,426,613)
------------------- ------------------- ------------------
Income tax expense (benefit)
Current 583,552 - -
Deferred 338,470 189,000 (429,000)
------------------- ------------------- ------------------
922,022 189,000 (429,000)
------------------- ------------------- ------------------
Net earnings (loss) $ 942,413 $ 789,939 $ (997,613)
=================== =================== ==================
Basic earnings (loss) per share $ 0.19 $ 0.16 $ (0.21)
=================== =================== ==================
Diluted earnings (loss) per share $ 0.18 $ 0.16 $ (0.21)
=================== =================== ==================
See notes to financial statements.
5
On-Site Sourcing, Inc.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2000, 1999 and 1998
Common Common Additional Subscriptions Treasury Retained
shares stock paid-in capital receivable stock earnings Total
------ ----- --------------- ---------- ----- -------- -----
Balance at
December 31, 1997 4,802,221 $48,022 $ 6,367,379 $ (50,400) $ - $ 727,986 $7,092,987
Sale of common stock
22,448 225 65,312 - - - 65,537
Common stock reacquired
- - - - (25,000) - (25,000)
Net loss - - - - - (997,613) (997,613)
========= ======== =========== ========== ========== ========== ==========
Balance at
December 31, 1998 4,824,669 48,247 6,432,691 (50,400) (25,000) (269,627) 6,135,911
Sale of common stock 27,000 270 37,230 - - - 37,500
Common stock reacquired - - - - (19,331) - (19,331)
Net earnings
- - - - - 789,939 789,939
========= ======== =========== ========== ========== ========== ==========
Balance at
December 31, 1999 4,851,669 48,517 6,469,921 (50,400) (44,331) 520,312 6,944,019
Sale of common stock 205,546 2,055 316,323 - - - 318,378
Common stock reacquired - - - - (351,821) - (351,821)
Net earnings - - - - - 942,413 942,413
========= ======== =========== ========== ========== ========== ==========
Balance at
December 31, 2000 5,057,215 $ 50,572 $ 6,786,244 $ (50,400) $ (396,152) $1,462,725 $7,852,989
========= ======== =========== ========== ========== ========== ==========
See notes to financial statements
6
On-Site Sourcing, Inc.
STATEMENTS OF CASH FLOWS
Years ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
Cash flows from operating activities
Net earnings (loss) $ 942,413 $ 789,939 $ (997,613)
------------ ----------- ------------
Adjustments to reconcile net earnings (loss)
to net cash used in operating activities
Depreciation and amortization 1,571,818 1,057,820 1,037,175
(Gain) loss on disposition of equipment 86,185 - (29,524)
Gain on disposition of division - (270,000) -
Changes in assets and liabilities
Decrease (increase) in accounts receivable, net (3,299,469) (540,597) 64,036
Increase in prepaid supplies (175,410) (52,995) (31,673)
Decrease (increase) in prepaid expenses (309,280) (25,726) 79,989
Increase in prepaid income taxes (715,674) - -
Decrease (increase) in other assets (80,492) (7,869) 23,719
Increase (decrease) in accounts payable 1,341,293 (209,615) 25,668
(Decrease) increase in accrued and other liabilities 47,128 112,524 (230,153)
Increase in deferred rent 55,609 11,657 25,402
Decrease in provision for income taxes - - (559,193)
Increase in deferred taxes 338,379 189,000 130,193
------------ ----------- ------------
(1,139,913) 264,199 535,639
------------ ----------- ------------
Net cash provided by (used in) operating activities (197,500) 1,054,138 (461,974)
------------ ----------- ------------
Cash flows from investing activities
Acquisition of property and equipment (4,535,672) (793,930) (1,090,034)
Proceeds from disposition of equipment 25,414 - 9,501
Advances in connection with sale of business division - (50,000) -
Receipt of payments on notes receivable 62,833 8,059 -
------------ ----------- ------------
Net cash used in investing activities (4,447,425) (835,871) (1,080,533)
------------ ----------- ------------
Cash flows from financing activities
Proceeds from sale of common stock and exercise of warrants 318,378 37,500 65,537
Proceeds of long-term debt agreements 231,461 - 316,000
Net borrowings short-term debt agreement 5,340,123 328,130 141,345
Payments under long-term debt agreements (912,470) (541,884) (471,077)
Payments for reacquisition of common stock (351,821) (19,331) -
------------ ----------- ------------
Net cash (used in) provided by financing activities 4,625,671 (195,585) 51,805
------------ ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (19,254) 22,682 (1,490,702)
Cash and cash equivalents, beginning 22,682 - 1,490,702
------------ ----------- ------------
Cash and cash equivalents, end $ 3,428 $ 22,682 $ -
------------ ----------- ------------
(continued)
7
On-Site Sourcing, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
Years ended December 31, 2000, 1999 and 1998
2000 1999 1998
-------------- ------------- -------------
Supplemental disclosure of cash flow activities
Interest paid $ 371,502 $ 181,714 $ 194,585
============== ============ ============
Income taxes paid $ 1,298,845 - -
============== ============ ============
Noncash investing and financing activities:
Equipment financed under capital lease obligations $ - $ - $ 269,508
============== ============ ============
Equipment financed through long-term debt $ 2,802,943 $ - $ 21,509
============== ============ ============
Purchase of treasury stock offset against note receivable $ - $ - $ 25,000
============== ============ ============
Proceeds from sale of equipment included in accounts receivable $ - $ - $ 65,000
============== ============ ============
Issuance of note receivable in connection with sale of business division $ - $ 270,000 $ -
============== ============ ============
Acquisition of assets financed through long term debt $ 6,276,666 $ - $ -
============== ============ ============
See notes to financial statements
8
On-Site Sourcing, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
1. OPERATIONS
NATURE OF BUSINESS
On-Site Sourcing, Inc. (the "Company") was incorporated in the Commonwealth
of Virginia on December 1992 and changed its state incorporation to
Delaware in January 1996. The Company performs various services, including
digital imaging, facilities management, litigation copying, and related
services at customer and company locations. The digital imaging, facilities
management and litigation copying services are performed in the
metropolitan areas of Philadelphia, Pennsylvania; Washington, D.C.;
Atlanta, Georgia; and New York, New York.
ACQUISITIONS
On April 12, 2000, the Company purchased certain assets and assumed certain
liabilities of Legend Lithographics, Inc. and Pseudon Communications, Inc.
(collectively, "Legend"), a digital printing and copying company, for
$438,172 in cash. The purchase price has been allocated to the fair value
of the assets acquired and liabilities assumed.
On September 6, 2000, the Company entered into a Stock Purchase Agreement
with Duplicating and Design, Inc. ("D&D") a digital printing and graphic
design company. Under the agreement, the Company purchased the capital
stock of D&D for an aggregate purchase price of $741,078 in cash, payable
in three installments through 2002. The Company has recognized the
acquisition as a purchase for accounting purposes. The purchase price has
been allocated to the fair value of the assets acquired and liabilities
assumed. The operations of D&D are included in the operations of the
Company as of the acquisition date.
In connection with the Legend and D&D acquisitions, the assets acquired and
liabilities assumed are as follows:
Tangible assets acquired at fair value $ 356,785
Goodwill 1,053,926
Liabilities assumed at fair value (231,461)
---------------------
$ 1,179,250
=====================
Proforma results of operations for the years ended December 31, 2000 and
1999 as if the acquisition had occurred at the beginning of 1999 are as
follows:
2000 1999
------------- -------------
(unaudited) (unaudited)
Revenue $ 36,017,711 $ 27,003,917
Net earnings $ 950,496 $ 801,108
Earnings per share:
Basic $ .19 $ .17
Diluted $ .18 $ .16
The proforma results do not purport to be indicative of results that would
have occurred had the acquisition been in effect for the period presented,
nor do they purport to be indicative of the results that will be obtained
in the future.
9
On-Site Sourcing, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000, 1999 and 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenue and expenses
during the reporting period. Management estimates include the allowance for
doubtful accounts on accounts receivable. Actual results could differ from
those estimates. Significant estimates are made when accounting for the
allowance for uncollectible accounts in connection with accounts
receivable.
REVENUE RECOGNITION
Revenue from reprographic and imaging services is recognized on a per copy
basis upon completion of the services. Facilities management revenue is
recognized based on monthly fixed fees and, in certain cases, on a variable
per copy fee basis, as defined in facilities management agreements.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the 2000
presentation.
SEGMENT DISCLOSURES
The Company complies with Statement of Financial Accounting Standards
("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for reporting information
about operating segments and related disclosures about products and
services, geographic areas and major customers.
INCOME TAXES
Deferred taxes are recognized based on the estimated future tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amount used for income
tax purposes. Income tax expense (benefit) represents the current tax
provision for the period and the change during the period in deferred and
current tax assets and liabilities. Deferred taxes for temporary
differences relate to depreciation, amortization, deferred rent, cash basis
adjustment and net operating loss carryforwards.
DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. Depreciation on property and
equipment is computed on a straight-line basis over the estimated useful
lives of the assets ranging from two to forty years for financial reporting
purposes. Accelerated methods are used for tax purposes.
Effective January 1, 1999, management reevaluated the usefull life of
certain equipment and, as a result, increased its estimate of the useful
life of the equipment from five to fifteen years. The change resulted in
an increase of net earnings of $174,570 or $0.04 per share for the year
ended December 31, 1999.
10
On-Site Sourcing, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000, 1999 and 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per share exclude dilution and are calculated using
the average number of shares outstanding. Diluted earnings (loss) per share
is computed on the basis of the average number of shares outstanding plus
the effect of outstanding stock options using the "treasury stock" method.
Year ended December 31,
2000 1999 1998
---------------- ---------------- ----------------
Net earnings (loss) available for common
shareholders (A) $ 942,413 $ 789,939 $ (997,613)
Average outstanding:
Common stock (B) 4,870,825 4,838,727 4,818,220
Employee stock options 450,118 71,197 -
Common stock and common stock equivalents (C) 5,320,943 4,909,924 4,818,220
Earnings (loss) per share:
Basic (A/B) $ .19 $ .16 $ (0.21)
Diluted (A/C) $ .18 $ .16 $ (0.21)
Unexercised employee stock options to purchase 531,798, 999,971 and
1,675,360 shares of the Company's common stock as of December 31, 2000,
1999 and 1998, respectively, were not included in the computations of
diluted earnings per share because the options' exercise prices were
greater than the average market price of the Company's common stock during
the respective period. In addition, since the Company had a net loss for
the year ended December 31, 1998, no potential common shares to be issued
are included in the computation of the diluted per share amount for that
year as they would be antidilutive. Accordingly, for the year ended
December 31, 1998, common stock equivalents totaling 130,285 are not
included in the weighted average shares of common stock outstanding.
GOODWILL
Cost in excess of fair value of net assets acquired resulting from
acquisitions is being amortized on a straight-line basis over a period of
ten years.
DEFERRED RENT
Deferred rent is recorded and amortized to the extent the total minimum
rental payments allocated to the current period on a straight-line basis
are less than the cash payments required.
11
On-Site Sourcing, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000, 1999 and 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less at the date of acquisition to be cash
equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosure about Fair Value of Financial Instruments." The estimated fair
value amounts have been determined using available market information,
assumptions and valuation methodologies.
SUBSCRIPTION RECEIVABLE AND NOTES RECEIVABLE
Management believes that it is not practicable to estimate the fair value
of notes because notes with similar characteristics are not available from
the Company.
LINE OF CREDIT AND LONG-TERM DEBT
The carrying amounts approximate fair value.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company complies with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles held and used by an entity be
reviewed for impairment whenever changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. To determine
recoverability of its long-lived assets, the Company evaluates the
probability that future undiscounted net cash flows will be less than the
carrying amounts of net assets. Impairment, if any, is measured at fair
value.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to a
concentration of credit risk, principally consist of trade accounts
receivable. Credit risk with respect to trade receivables is also limited
because the Company deals with a large number of customers in a wide
geographic area.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting
and reporting standards for derivative instruments. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Adoption of SAFS No. 133 is not expected to
have a material impact on the Company's financial statement presentation or
disclosure.
12
On-Site Sourcing, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000, 1999 and 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
In April 2000, the FASB issued FASB Interpretation ("FIN") No. 44,
"Accounting for Certain Transactions Involving Stock Compensation and
Interpretation of APB No. 25," which is effective July 1, 2000, except for
certain conclusions which cover specific events after either December 15,
1998, or January 12, 2000. FIN No. 44 clarifies the application of APB No.
25 related to modifications of stock options, changes in grantee status,
and options issued on a business combination, among other things. The
adoption of FIN No. 44 is not expected to have a significant impact on the
Company's financial position or results of operations.
INTEREST RATE SWAP AGREEMENT
The Company has entered into an interest rate swap agreement to reduce the
impact of changes in interest rates on its floating rate long-term debt. At
December 31, 2000, the Company had an outstanding interest rate swap
agreement with a commercial bank, having a total notional amount of
$5,800,000. The interest rate swap agreement matures at the time the
related note matures. The agreement effectively changes the Company's
interest rate exposure on a $5,800,000 promissory note at a fixed rate of
9.48%. The Company is exposed to credit loss in the event of nonperformance
by the other parties to the interest rate swap agreements. However, the
Company does not anticipate nonperformance by counterparties.
3. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at December 31:
2000 1999
-------------------- -------------------
Trade receivables $ 10,201,371 $ 6,979,040
Other receivables - 28,000
Allowance for uncollectible accounts (439,278) (544,416)
-------------------- -------------------
$ 9,762,093 $ 6,462,624
==================== ===================
OTHER ASSETS
Other assets consist of the following at December 31:
2000 1999
-------------------- -------------------
Deposits $ 110,286 $ 67,756
Employee advances 53,137 15,175
-------------------- -------------------
$ 163,423 $ 82,931
==================== ===================
13
On-Site Sourcing, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000, 1999 and 1998
3. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS (Continued)
PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
2000 1999
------------------- --------------------
Land $ 4,562,066 $ -
Building 2,916,730 -
Copiers 4,547,690 3,609,823
Computers, equipment and other 7,225,951 3,428,547
Vehicles 476,489 332,551
-------------------- ---------------------
19,728,926 7,370,921
Accumulated depreciation (4,704,900) (3,266,815)
-------------------- ---------------------
$ 15,024,026 $ 4,104,106
==================== =====================
Depreciation expense charged to operations was $1,529,836, $1,057,820 and
$1,037,175 for the years ended December 31, 2000, 1999 and 1998,
respectively.
ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities consist of the following at December 31:
2000 1999
------------------ -------------------
Accrued salaries, commissions, taxes and fringe benefits $ 496,684 $ 459,192
Accrued sales tax payable 123,584 155,670
Other accrued liabilities 233,718 191,996
------------------ -------------------
$ 853,986 $ 806,858
================== ===================
4. SEGMENT INFORMATION
The Company's reportable segments are strategic business units that offer
different products and services. The Company has three reportable segments:
imaging, reprographics and facilities management services. Imaging services
include coding, scanning and blowbacking. Reprographic services include
copying, binding, labeling, collating and indexing materials. Facilities
management services include on-premises management of the customer's
support services, including mailroom operations, facsimile transmission,
records and supply room management and copying services. Other operating
segments primarily include information technology in 1998 and 1999 and
digital printing in 2000. During 1999, the company sold the information
technology business segment (note 13).
14
On-Site Sourcing, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000, 1999 and 1998
4. SEGMENT INFORMATION (Continued)
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (note 2). The Company
evaluates performance based on profit and loss from operations before
income taxes and does not review information regarding the allocation of
assets to each segment. In addition, corporate administrative costs are not
allocated to each segment. There are no intersegment sales or transfers.
Revenue and profit by reportable segment for the years ended December 31,
2000, 1999 and 1998 are as follows:
Reprographic services Facilities management services
----------------------------------------- --------------------------------------------
2000 1999 1998 2000 1999 1998
----------------------------------------- --------------------------------------------
Revenue $ 21,126,318 $ 20,250,011 $ 20,447,165 $ 3,039,566 $ 3,222,480 $ 4,002,208
Segment profit $ 6,473,182 $ 2,873,962 $ 1,264,860 $ 411,607 $ 685,706 $ 459,702
Imaging Services
-------------------------------------------
2000 1999 1998
-------------------------------------------
Revenue $ 9,473,123 $ 2,219,759 $ -
Segment profit $ 4,397,652 $ 599,959 $ -
A reconciliation of segment revenue and profit to total revenue and
earnings (loss) from operations is as follows:
2000 1999 1998
------------------ ------------------ ------------------
Revenue
Total revenue for reportable segments $ 33,639,007 $ 25,692,250 $ 24,449,373
Other revenue 1,850,904 978,653 1,516,350
------------------ ------------------ ------------------
Total revenue $ 35,489,911 $ 26,670,903 $ 25,965,723
================== ================== ==================
Profit or loss
Total profit for reportable segments $ 11,282,441 $ 4,159,627 $ 1,724,562
Other loss (8,894,016) (3,303,846) (3,143,893)
------------------ ------------------ ------------------
Earnings (loss) before other income, interest
expense and income taxes $ 2,388,425 $ 855,781 $ (1,419,331)
================== ================== ==================
15
On-Site Sourcing, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000, 1999 and 1998
5. LINE OF CREDIT
At December 31, 1999, the Company had available a working capital line of
credit with a financial institution in the amount of $2,500,000. During
2000, the available line of credit was increased to $6,000,000 as of
December 31, 2000. The working capital line of credit is collateralized by
accounts receivable and certain equipment as described in the agreement.
The working capital line of credit expires April 30, 2001 and is subject to
certain financial covenants, including minimum tangible net worth
requirements. The line of credit bears interest at the bank's prime rate or
the 30-day LIBOR rate plus 2.25% (9.0713% at December 31, 2000).
6. LONG-TERM DEBT
Long-term debt is as follows:
2000 1999
------------------- -------------------
Equipment note of $1,100,000 at 9.02%, collateralized by certain
assets of the Company, payable in equal monthly installments of
$22,916 plus interest, maturing in November 2001. $ 68,750 $ 343,750
Equipment note at 8.75%, collateralized by the equipment, payable in equal
aggregate monthly installments of $5,594 plus interest, maturing
in March 2001. 69,037 139,416
Vehicle notes at 5.0%, collateralized by the vehicles, payable in equal
aggregate monthly installments of principal and interest of
approximately $983, maturing in October 2001. 10,548 21,518
Vehicle notes at 9.7%, collateralized by the vehicles, payable in equal
aggregate monthly installments of principal and interest of
approximately $1,272, maturing in August 2001. 9,810 23,412
Equipment note at 8.75% collaterized by the equipment, payable in equal
aggregate monthly installments of principal and interest of
approximately $7,380, maturing in July 2002. 131,443 210,124
Vehicle note at 6.88%, collateralized by the vehicle, payable in equal
aggregate monthly installments of principal and interest of
approximately $425, maturing in November 2003. 13,435 17,455
Loan assumed in connection with an acquisition (see note 1) at 10%
collateralized by certain equipment, payable in equal monthly
principal and interest installments of $6,183, maturing January 2002. 91,509 -
16
On-Site Sourcing, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000, 1999 and 1998
6. LONG-TERM DEBT (Continued)
2000 1999
----------- ----------
Loan assumed in connection with the acquisition of certain assets 9,874 -
(see note 1) at 9.5%, payable in equal monthly principal and interest
installments of $9,966, maturing January 2001.
Loan made in connection with the acquisition of certain assets (see note 1)
noninterest bearing, payable in two annual payments of
$238,333, maturing September 2002. 476,666 -
Equipment note at 10.14%, collateralized by certain assets, payable in
equal monthly installments of $31,250 plus interest, maturing on
June 2003. 937,500 -
Equipment note at 9.98%, collateralized by certain equipment, payable in
equal monthly principal and interest installments of $8,108,
maturing September 2005. 365,202 -
Equipment note at 10.25%, collateralized by certain equipment, payable in
equal monthly principal and interest installments of
$20,118, maturing October 2008. 1,276,531 -
Vehicle notes at 4.9%, collateralized by the vehicles, payable in equal
aggregate monthly installments of principal and interest of
$860, maturing in August 2004. 30,914 -
Promissory note at 9.48%, subject to an interest rate swap agreement,
collateralized by the land and building, (see note 14) payable in monthly
installments of principal plus interest maturing in November
2007 with a balloon payment due at maturity. 5,785,325 -
Capital leases obligations (see note 7) 222,450 344,719
------------------- -------------------
9,498,994 1,100,394
Less current maturities included in current liabilities (1,401,184) (571,707)
------------------- -------------------
$ 8,097,810 $ 528,687
=================== ===================
17
On-Site Sourcing, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000, 1999 and 1998
6. LONG-TERM DEBT (Continued)
Aggregate maturates for long-term debt is as follows:
Year ending December 31, 2001 $ 1,401,184
2002 1,171,201
2003 659,881
2004 478,887
2005 493,927
Thereafter 5,293,914
------------------
$ 9,498,994
==================
7. LEASES
The Company leases its office facilities, copiers and office equipment
under various operating and capital leases. Lease terms range from one to
approximately six years.
Minimum annual rental and lease commitments for leases with a remaining
term of one year or more at December 31, 2000, are as follows:
Year ending December 31, Capital leases Operating leases
------------------------------------------- ---------------- ----------------
2001 $ 143,250 $ 1,496,405
2002 81,832 1,413,913
2003 23,906 1,107,178
2004 - 939,941
2005 - 716,215
Thereafter - 315,376
-------------- ----------------
Total minimum lease payments 248,988 $ 5,989,028
================
Less: interest 26,538
--------------
Present value of net minimum lease payments $ 222,450
==============
Fixed assets recorded under capital leases as of December 31, 2000 and 1999
total approximately $659,000 each year, representing reprographic machines,
and computer equipment. Interest expense on the outstanding obligations
under capital leases was approximately $33,444, $45,717 and $15,400 for the
years ended December 31, 2000, 1999 and 1998, respectively.
18
On-Site Sourcing, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000, 1999 and 1998
7. LEASES (Continued)
Rent expense was $2,512,366, $2,243,190 and $1,488,294 for the years ended
December 31, 2000, 1999 and 1998, respectively.
8. RELATED PARTY TRANSACTIONS
During the years ended December 31, 1999 and 1998, the Company recorded the
following transactions with a shareholder and former officers.
o During 1998, the Company billed a former shareholder and officer
approximately $16,500 for reprographic services.
o During 1998, the Company incurred approximately $40,000 for legal
services rendered by a former shareholder and officer.
o In March 1996, the Company loaned $89,900 to an officer/director. The
loan bears interest at 6% per year. The balance of $50,400 at December
31, 2000 is due on demand.
9. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with its officers and
certain employees. The agreements provide for base salaries, contingent
incentive compensation based on achievement of certain sales and other
goals, noncompete and nondisclosure restrictions and, in certain cases,
stock options which vest over a period of time. The agreements are
terminable at the discretion of the Company.
10. INCENTIVE STOCK OPTION PLAN
The Company adopted an incentive stock option plan for 1998, 1997, 1996 and
1995 under which a pool of 700,000, 500,000, 242,000 and 510,000 shares,
respectively, has been reserved. The plan is administered and terms of
option grants are established by the Board of Directors. Under the terms of
the plan, options may be granted to the Company's employees to purchase
shares of common stock. Options become exercisable ratably over a vesting
period as determined by the Board of Directors, and expire over terms not
exceeding 10 years from the date of grant, three months after termination
of employment, or one year after the death or permanent disability of the
employee. The Board of Directors determines the option price (not less than
fair market value) at the date of grant.
19
On-Site Sourcing, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000, 1999 and 1998
10. INCENTIVE STOCK OPTION PLAN (Continued)
The Company applied APB Opinion No. 25 and related Interpretations in
accounting for its plans. Had compensation cost been determined in
accordance with FASB No. 123, the Company's net income (loss) and net
income (loss) per share would have been the proforma amounts indicated
below:
Net income (loss): 2000 1999 1998
-------------------- --------------------- ---------------------
As reported $ 942,313 $ 789,939 $ (997,613)
Proforma 707,573 634,985 (1,225,712)
Net income (loss) per common share - Basic:
As reported .19 .16 (0.21)
Proforma .15 .13 (0.25)
Net income (loss) per common share - Diluted:
As reported .17 .16 (0.21)
Proforma .13 .13 (0.25)
All options granted during the years ended December 31, 1999 and 1998 were
issued pursuant to the incentive stock option plans. The fair value of each
option grant under the plan is estimated on the date of grant using the
Black-Scholes option-pricing model. The following weighted-average
assumptions for 2000, 1999 and 1998, respectively, were used: expected
dividend yields of 0.0%, 0.0% and 0.0%, expected volatility rates of 75%,
72% and 48%, risk-free rates of 5.7%, 4.6% and 5.5%, respectively, and
expected lives of 1 to 4 years.
At December 31, 2000, 1999 and 1998, the Company had outstanding options to
sell 625,600, 469,825 and 434,937 shares, respectively, of common stock to
officers and directors at exercise prices ranging from $1.13 to $4.25 per
share. The options expire through 2005.
During 2000, 1999 and 1998, the Company granted options for 936,500,
161,000 and 1,182,285 shares of common stock, respectively, at exercise
prices ranging from $1.13 to $4.625 per share, respectively. The grant
price per share was equal or greater than the market price at the date of
grant. During 2000 and 1999, options for 194,844 and 630,402 shares of
common stock expired and 205,546 and 27,000 were exercised, respectively.
As of December 31, 1998, options for 781,885 of the shares are vested and
outstanding. As of December 31, 2000 and 1999, options for 422,757 and
795,442 of the shares are vested with the remainder scheduled to vest
through February 2005 and October 2002, respectively. The options expire
through October 2005.
20
On-Site Sourcing, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000, 1999 and 1998
10. INCENTIVE STOCK OPTION PLAN (Continued)
The following depicts activity in the plan for three years ended December
31, 2000:
Options outstanding
Per share
Shares exercise prices
------ ---------------
Outstanding, January 1, 1998 966,755 $ 1.10-3.25
Options granted 1,182,225 1.13-3.44
Options exercised 5,000 1.11
Options expired 468,620 2.13-3.00
------- ---------
Outstanding, December 31, 1998 1,675,360 1.10-3.00
Options granted 161,000 1.38-1.88
Options exercised 27,000 1.39
Options expired 630,402 1.11-3.44
------- ---------
Outstanding, December 31, 1999 1,178,958 1.10-3.44
Options granted 936,500 1.75-4.625
Options exercised 205,546 1.11-3.250
Options expired 194,844 2.25-4.625
------- ---------
Outstanding, December 31, 2000 1,715,068 $ 1.10-4.625
------- ---------
------- ---------
11. INCOME TAXES
The amounts and sources of the provision for current and deferred income
tax expense (benefit) were as follows for the year ended December 31:
2000 1999
------------------- ------------------
FEDERAL
Current $ 366,752 $ -
Deferred 256,767 157,113
------------------- ------------------
623,519 157,113
------------------- ------------------
STATE
Current 216,800 -
Deferred 81,703 31,887
------------------- ------------------
298,503 31,887
------------------- ------------------
Total provision for income taxes $ 922,022 $ 189,000
=================== ==================
21
On-Site Sourcing, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000, 1999 and 1998
11. INCOME TAXES (Continued)
Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes. Components of the Company's deferred tax liability (benefit) are
as follows:
2000 1999
---- ----
Excess of tax over financial accounting
depreciation $ 485,844 $ 385,724
Cash to accrual adjustment 330,564 640,807
Loss carryforwards - (720,338)
Other (91,847) 79,989
------------- -------------
$ 724,561 $ 386,182
------------- -------------
------------- -------------
Beginning in 1998, the Company was required to report on the accrual basis
for federal and state income tax purposes. In accordance with Internal
Revenue Service Code, the amount of income tax due resulting from the
conversion from cash to accrual is payable over 4 years.
12. EMPLOYEE BENEFIT PLAN
The Company sponsors a plan to provide retirement benefits under the
provision of Section 401(k) of the Internal Revenue Code (the 401(k) Plan)
for all employees who have completed one year of service and have reached
their 21st birthday. Company contributions may range from 0% to 100% of
employee contributions. Employees may elect to contribute up to 25% of
their eligible compensation on a pretax basis. Benefits under the 401(k)
Plan are limited to the assets of the 401(k) Plan. During the years ended
December 31, 2000, 1999 and 1998, respectively, the Company made no
contributions to the 401(k) Plan.
13. SALE OF INFORMATION TECHNOLOGY DIVISION
On September 30, 1999, the Company entered into a purchase and sale
agreement with a former stockholder and employee to sell the rights and
contracts to provide certain information technology services to customers
previously serviced by the Company's Information Technology Division. The
sale price, in the amount $270,000, is financed by a note agreement between
the Company and former shareholder. The note accrues interest at 8% per
annum, is payable in interest only installments through September 2000 and
in principal and interest installments until maturity in September 2002. At
December 31, 2000, $249,108 remains payable to the Company.
In connection with the sale, the Company entered into an additional note
agreement with the former shareholder in the amount of $50,000. The note
accrued interest at 8% per annum. The note was paid during 2000.
22
On-Site Sourcing, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000, 1999 and 1998
14. PURCHASE OF PROPERTY
On November 16, 2000, the Company acquired the option to purchase certain
property consisting of land and buildings for use as its corporate
headquarters and as an operating facility. As consideration, the Company
agreed to pay $1,995,000 for the assignment of the option and $5,505,000 to
exercise the option and purchase the property. In connection with the
purchase, the Company entered into a note agreement with a bank in the
amount of $5,800,000 (see note 6).
15. MERGER AGREEMENT
In July 2000, the Company entered into a definitive merger agreement with
U.S. Technologies Inc. ("U.S. Technologies") pursuant to which U.S.
Technologies will acquire the Company. Under the terms of the agreement,
stockholders of the Company will receive, at their election, U.S.
Technologies' stock, cash, or a combination of stock and cash (subject to
proration due to the cash limitation and adjustment formula as prescribed
in the agreement) in exchange for their shares. The amount of consideration
each shareholder of the Company will receive is based on a total estimated
purchase price of $35 million. The per-share consideration each shareholder
of the Company will receive will depend on the number of shares of the
Company and options outstanding at the effective time of the merger.
The Company's warrants to buy shares at $6.00 are expected to be converted
to U.S. Technologies' warrants, with the exercise price and number of
shares to be adjusted based on the stock conversion formula for the merger.
The expiration date of these warrants will be extended for one year to July
8, 2002. All options outstanding at closing will be converted into options
to purchase U.S. Technologies' common stock, with the exercise price and
number of shares to be adjusted based on the stock conversion formula for
the merger.
Closing is subject to certain conditions including shareholder approval and
Securities and Exchange Commission ("SEC") registration of the securities
to be issued in the merger. The merger agreement expires on March 31, 2001,
if a closing has not occurred. If the agreement is terminated by the
company prior to March 31, 2001, a penalty in the amount of $1.5 million
may be imposed under the agreement. However if certain U.S. Technologies
stock price requirements, as defined under the merger agreement, are not
met by March 31, 2001, the company has the right to terminate the agreement
without being subject to the penalty. On April 2, 2001, the Company
exercised its option to terminate the merger agreement. In connection with
the merger the Company incurred $330,807 of merger related costs during
2000, which were expensed in the fourth quarter of 2000.
23