<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1999
Commission File No. 0-20947
ON-SITE SOURCING, INC.
(Name of Small Business Issuer in its Charter)
Delaware 54-1648470
(State of Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
1111 North 19th Street, Sixth Floor, Arlington, VA 22209
(Address of Principal Executive Offices) (Zip Code)
703-276-1123
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: NONE
----
Securities registered under Section 12(g) of the Exchange Act:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
Units comprised of two shares of Common NASDAQ (since 7/11/96)
Stock and one Common Stock Purchase Warrant
Common Stock ($.01 par value) NASDAQ (since 8/19/96)
Common Stock Purchase Warrants NASDAQ (since 8/19/96)
</TABLE>
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
--- ---
This report contains a total of 33 pages. The Exhibit Index appears on page 31.
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of the issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $ 26,670,903.
Aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant as of March 15, 2000 was approximately
$17,529,860 based upon the closing price reported for such date on the Nasdaq
SmallCap Market. For purposes of this disclosure, shares of common stock held
by persons who hold more than 5% of the outstanding shares of Common Stock
and shares held by officers and directors of the Registrant have been
excluded because such persons may be deemed to be affiliates. The
determination of affiliate status is not necessarily a conclusive
determination for other purposes.
The number of shares outstanding of the issuer's shares of common stock as of
March 30, 2000 was 4,900,740.
Transitional Small Business Disclosure Format Yes No X
--- ---
1
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
- ---------------------------------
On-Site Sourcing, Inc. ("On-Site", "Company", "We" or "Us") provides digital
imaging, document management, litigation reprographics services and facilities
management to law firms, corporations, non-profit organizations, accounting
firms, financial institutions and other organizations throughout the East Coast
of the United States. In order to meet the highly specialized requirements of
each client, we offer a variety of customized reprographic and facilities
management services. We provide reprographic and imaging services 24
hours-per-day, seven days-per-week including copying, binding, labeling,
collating and indexing in support of complex document-intensive litigation as
well as higher volume production of manuals, brochures and other materials for
corporations and non-profit organizations. We also provide on-premises
management of customers' support services including mailroom operations,
facsimile transmission, records and supply room management and copying services.
On-Site Sourcing, Inc. was founded in 1992 and currently serves the greater
Washington, Baltimore, Philadelphia, New York City and Atlanta metropolitan
areas through outsourcing locations in Arlington, Virginia; Baltimore, 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 area. Customers include a number of the
large law firms, corporations and non-profit entities operating in these cities.
The Company was originally incorporated in Virginia in December 1992 and changed
its state of incorporation to Delaware in January 1996.
STRATEGY. During 1999, as part of our strategic planning process, we
refocused on our three core strengths - imaging, digital printing and legal
copying - all of which are critical components in the development and
maintenance of a strong document management capability. We reworked the imaging
business model and sold the Information Technology business. During our
strategic planning process, our goal was to identify specific actions that would
give us a competitive advantage. We received a U.S. patent for a process that
captures billable data from our photocopier. This technology will be integrated
into a web based document management system that will include tracking, billing
and electronic file management systems.
We also plan to continue to consider making selective acquisitions that
will deepen our base in a particular geographic location or that will complement
our existing capabilities. We will look for strategic partnerships with document
management hardware providers and continue to develop new proprietary processes
to achieve our goal of being a leader in e-based document management.
We earn a significant portion of our revenue by providing reprographic,
imaging and litigation support services to law firms and corporations. This
accounts for approximately 88 percent of the Company's revenue. Facilities
management accounts for approximately 12 percent of the revenue. Each service,
while independent to the client, shares personnel and resources in order to
minimize costs and provide high quality services.
OPERATIONS. We provide our services through regional offices in
metropolitan Washington, DC, Philadelphia, PA, New York, NY, Baltimore, MD, and
Atlanta, GA. These facilities maintain staff, equipment, supplies and training
facilities in order to provide reprographic, imaging, and litigation support
services to a variety of customers. We place professional management at each
regional office and provide employees with ongoing training in equipment
operation and maintenance, customer satisfaction, interpersonal skills, and
quality control. Equipment and supplies are provided by numerous regional and
national vendors.
Our facilities management services provide reprographic, mailroom and
facsimile and other services required on the premises of its customers. We
conduct a comprehensive analysis of each client's needs and tailor the services
provided to these needs based on volume, time, and quality requirements. At
facilities management locations, we provide on-site management of the client's
support services such as copy, mail, supply and records rooms. Mailroom services
include distributing all mail and interoffice correspondence; processing,
logging and billing outgoing mail, parcels and special courier items; logging,
billing, and tracking transmission of outgoing facsimiles and distributing
incoming facsimiles. In the supply room services, we provide all required
materials through a "Just in Time" system designed to minimize the costs of
logging and tracking materials provided. Records room services include
utilization of bar code applications and state-of-the-art imaging and scanning
equipment to store documents and data base information for quick retrieval and
copying. Copy room management involves tracking, logging and billing all copies,
and providing repair services to copy machines.
2
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In addition, specialized proprietary software generates operating data that
allows us to analyze vendor, copy and overtime costs, as well as copy volume,
and to prepare profit and loss statements that offer solutions to productivity
problems.
Our reprographic and litigation support services to law firms and
corporations include copying, binding, drilling, "Bates" stamping, labeling,
collating, indexing, assembling and quality review. We have technology which
allows customers to "telecommute" by sending documents instantaneously via the
Internet to computers at On-Site. The documents are then transferred into the
memory of a copy machine and reproduced.
Our imaging and digital printing services allow for the transfer of
information from paper documents into electronic media. Services include case
management consulting, indexing/coding, scan to image, blowback printing,
document enlargement and document search and retrieval services. We believe that
these services will continue to expand as we incorporate our web-based strategy
for managing documents.
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 customer base
is the premium service segment of the market in which speed, accuracy and
quality are critical. Our clients include many of the largest law firms and
business entities in the markets served.
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, all employees are bonded, sign
confidentiality agreements and agree to undergo drug tests. We believe these
programs result in higher employee productivity and professionalism. As of
December 31, 1999, the Company had approximately 375 full-time employees, of
which 4 are in executive positions. None of our employees are represented by a
labor union and we consider our employee relations to be satisfactory.
COMPETITION. The reprographics and facilities management businesses are
highly competitive. The most significant competition is from prospective clients
themselves, which provide these services internally. The national competitors
providing facilities management services include Pitney Bowes Management
Services and Xerox Business Systems. IKON Corporation and Donnelley Enterprise
Solutions, Inc. are national competitors providing both reprographic and
facilities management services, while Copy America, Balmar and Reliable are
regional competitors providing both of these services in the markets served by
On-Site.
TECHNOLOGY AND PROPRIETARY INFORMATION. The SiteTrax platform was
created as a solution to automate the highly complex document and facilities
management industry. Effective document management and reproduction, be it mail
or fax management, litigation copying, on-demand printing or document imaging
requires a tremendous monitoring, tracking and accountability solution. These
functions are mission critical, yet peripheral to the task of "putting paper to
machine". Even in the productive 90's, the document management industry
inefficiently uses expensive labor to dispatch these peripheral functions as
required to actually produce the product.
With the genesis of SiteTrax, we have effectively automated all
peripheral functions. SiteTrax manages every step of the production and
management process, from logging in projects, tracking them throughout the
production and quality control process through 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, all at the click of a mouse.
These automated processes make our production and management process more
efficient and productive. The resultant savings are passed on to our clients in
the form of greater investment in quality control, competitive pricing, and
superior tracking, reporting and accountability.
During 1999, we received a U.S. patent for our real-time invoicing and
productivity analysis technology. The proprietary process, which is called
Costrax, will enable us to automate certain billing and job tracking functions
which will create an improved 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.
We rely on confidentiality and non-competition agreements with our
employees in order to protect our proprietary know-how and employ various
methods to protect the software, concepts, ideas and documentation of its
proprietary technology. However, such methods may not afford complete
protection, and there can be no assurance that others will not independently
develop similar know-how or obtain access to our know-how or software, concepts,
ideas and documentation. Furthermore, although we have and expect to have
confidentiality and non-competition agreements with its employees, consultants,
and appropriate vendors, there can be no assurance that such arrangements will
adequately protect trade secrets.
3
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ITEM 2. DESCRIPTION OF PROPERTIES
- -----------------------------------
Our executive offices and reprographic operations which service the
metropolitan Washington, DC area are located in approximately 31,000 square feet
of leased space in Arlington, Virginia. The lease provides for a base annual
rent of $450,000 and an expiration date in December 2001. In addition, from time
to time and based on customer needs, we may execute month-to-month leases for
additional space in the same or adjacent buildings as the Arlington, Virginia
facility. We lease approximately 5,500 square feet of additional space under a
lease agreement which provides for a base annual rent of $110,000 and an
expiration date in December 2000.
We lease approximately 10,500 square feet of office space in
Philadelphia, PA. The lease provides for a base annual rent of $154,700 and an
expiration date in October 2000.
We lease warehouse storage space located in approximately 12,500 square
feet of leased space in Brentwood, MD. The lease provides for a base annual rent
of $48,000 with additional operating costs of $2,000 per year and an expiration
date in August 2000.
We lease warehouse storage space located in approximately 11,500 square
feet of leased space in Alexandria, Virginia. The lease provides for a base
annual rent of $75,000 and an expiration date in March 2001.
We have offices located in approximately 18,000 square feet of leased
space in Atlanta, GA. The lease provides for a base annual rent of $91,200 and
an expiration date in April 2005.
We have offices located in approximately 14,100 square feet of leased
space in New York, NY. The lease provides for a base annual rent of $268,000
with an annual 3 % increase on November 1 of each subsequent year through
November 2005. The lease expiration date is October 31, 2006.
We have offices located in approximately 9,700 square feet of leased
space in Baltimore for a base rent of $138,000 with a 3% annual increase each
subsequent year. The lease expires on February 14, 2008.
We believe that our current facilities are adequate for our current and
reasonably foreseeable future needs for the markets that each facility serves
and that additional physical capacity at our current facilities is available to
accommodate expansion, if required.
ITEM 3. LEGAL PROCEEDINGS
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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 1999, covered by this report, no matters
were submitted to a vote of our security holders.
4
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDERS' MATTERS
----------------------
PRICE RANGE OF COMMON STOCK
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The following table shows the high and low closing bid prices for the
Common Stock in the over-the-counter market. 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. The table
below represents the quarterly high and low sales prices for each quarter in
1998 and 1999.(1)
The quotations represent prices between dealers in securities, do not
include retail markup, markdowns or commissions and may not necessarily
represent the actual transactions.
<TABLE>
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COMMON STOCK WARRANTS UNITS
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<S> <C> <C> <C> <C> <C> <C>
Quarter Ended: HIGH LOW HIGH LOW HIGH LOW
- --------------------------------------------------------------------------------------------------------------------------
March 31, 1998 3.630 2.810 .813 .344 7.875 5.625
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June 30, 1998 3.130 2.130 .594 .344 6.625 4.50
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September 30, 1998 2.310 1.060 .438 .156 5.250 2.50
- --------------------------------------------------------------------------------------------------------------------------
December 31, 1998 1.840 1.030 .406 .125 3.750 2.125
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March 31, 1999 2.25 1.188 .344 .188 5.00 3.25
- --------------------------------------------------------------------------------------------------------------------------
June 30, 1999 2.438 1.406 .313 .188 3.625 3.125
- --------------------------------------------------------------------------------------------------------------------------
September 30, 1999 1.75 1.063 .250 .156 3.125 3.00
- --------------------------------------------------------------------------------------------------------------------------
December 31, 1999 1.656 .969 .250 .125 3.00 2.125
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</TABLE>
(1) The Company issued units comprised of two shares of Common Stock and one
Common Stock Purchase Warrant in connection with the initial public offering.
The Units began trading on the Nasdaq SmallCap Market on July 11, 1996 and the
Common Stock and Warrants began trading separately on August 19, 1996 with the
Units also continuing to trade.
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
As of December 31, 1999, there were 44 holders of record and
approximately 1,170 beneficial owners of the Common Stock.
DIVIDENDS
We have never paid cash dividends on our common stock. Payment of
dividends will be within the discretion of the our Board of Directors and will
depend on, among other factors, earnings, capital requirements, and the
operating and financial condition of the Company. At the present time, we
anticipate retaining future earnings, if any, in order to finance the
development of our business activities.
RECENT ISSUANCES OF COMMON STOCK
On February 15, 1999 the Company issued 27,000 shares of its Common Stock
pursuant to the exercise of employee stock options. The sales of securities
described above were made in reliance upon Section 4(2) of the 1933 Act, which
provides exemptions for transactions not involving a public offering, and the
certificates for the securities bear a legend accordingly.
5
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- -------------------------------------------------------------------------------
The information in this section should be read in conjunction with the
information contained in the financial statements and related notes in "Item 7.
Financial Statements."
This Annual Report on Form 10-KSB, including the documents Incorporated
by reference, contains forward looking statements within the meaning of Section
21B of the Securities Exchange Act of 1934, as amended. Such statements appear
in a number of places in this Annual Report, including without limitation, under
"Item 6. Management's Discussion and Analysis" and within the information
related to the impact of the year 2000. When the company refers to
forward-looking statements or information, sometimes the Company uses words as
"may," "will," "could," "should," "plans," "intends," "expects," "believes," or
similar expressions. All subsequent written and oral forward-looking statements
attributable to the Company and persons acting on its behalf are qualified by
their entirety by the cautionary statements contained in this Annual Report.
Actual events or results may differ materially from those discussed in
forward-looking statements. The company undertakes no duty to update any
forward-looking statements, or to publicly release the results if it revises any
of them. Factors which may cause the actual results of operations in future
periods to differ materially from intended or expected results include, but are
not limited to:
[the following are intended as examples only]
- the loss of any key employees could adversely impact its ability to
secure and complete engagements because the Company's business
involves the delivery of professional services and is labor intensive;
- the availability and terms of additional capital or debt financing to
fund future acquisitions and for working capital purposes;
- significant competition for business opportunities because of the
fragmented nature of companies offering similar services and the low
barrier of entry;
- fluctuations of revenue and operating income between quarters.
GENERAL
We began to provide reprographic and facilities management services
to the premium service segment of the Philadelphia, PA market in June 1993.
We subsequently expanded our geographic market to include Washington, DC,
Baltimore, MD, New York, NY and Atlanta, GA. 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, imaging services, information
technology and litigation support account for approximately 88% of total
revenues while facilities management accounts for 12% of total revenue for
the year ended December 31, 1999.
The revenue 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.
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 three core businesses - imaging, digital printing and legal
copying. Our plans include positioning ourselves to become a national e-based
document management leader through product enhancements, development of new
technology, 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 allows 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.
6
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RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR
ENDED DECEMBER 31, 1998
REVENUES
Our revenues are primarily derived from reprographics, imaging
services, litigation support and facilities management services. Revenues in
1999 of $26.67 million were 2.7% higher than 1998 levels 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 $1.3 million in 1998 to
$2.23 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.
COSTS, EXPENSES AND GROSS PROFIT
The 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 27.38% compared to 16.37% in 1998. A major contribution to the
improvement in margins was 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 operations, which continued to experience lower than expected gross
profits, were divested during the 3rd quarter of 1999.
Selling expenses, consisting predominantly of sales commissions,
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 primarily due to the sale of
the information technology division in September 1999.
Provision for income taxes of $189,000 resulted from 1999 pre-tax
earnings compared to a 1998 loss. The net operating loss carry forward at
December 31, 1999 is $197,000 and expires in 2014.
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 the 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.
In order to assure additional working capital is available to us to
fund our growth and expansion, we have available a $2,500,000 working capital
line of credit. The working capital line of credit is subject to certain
financial covenants and bears interest at the bank's prime rate of interest or
the 30 day LIBOR rate plus 2.25%. The underlying loan has a maturity date of
April 30, 2000. At December 31, 1999 net advances totaling $469,475 were made
under this agreement.
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 9.7% and mature at various times between 2000 and 2003.
During 1999, we repurchased 14,300 shares of our common stock. The
shares were repurchased on the open market and will be held for future
initiatives.
On March 2, 2000, we entered into a non-binding letter of intent to
purchase certain assets and assume certain note and lease obligations of an
offset printing and pre-press service company. We are currently negotiating
terms of the transaction.
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, 1999 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.
YEAR 2000
We successfully completed our program to ensure Year 2000 readiness. As a
result, we had no Year 2000 problems that affected its business, results of
operations or financial condition.
7
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ITEM 7. FINANCIAL STATEMENTS
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INDEX TO FINANCIAL STATEMENTS
PAGE
INDEPENDENT AUDITORS' REPORT 9
FINANCIAL STATEMENTS
BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998 10
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1999 AND 1998 11
STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE
YEARS ENDED DECEMBER 31, 1999 AND 1998 12
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1999 AND 1998 13
NOTES TO FINANCIAL STATEMENTS 15
8
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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, 1999 and 1998, and the related statements of
operations, stockholders' equity and cash flows for the years then ended. 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, 1999 and 1998, and the results of its operations and
its cash flows for the years then ended, in conformity with generally accepted
accounting principles.
Bethesda, Maryland
January 31, 2000, except for Note 7
which is dated March 1, 2000
9
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On-Site Sourcing, Inc.
BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------- -------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 22,682 $ -
Accounts receivable, net 6,462,624 5,922,028
Supplies 502,361 449,366
Prepaid expenses 162,484 136,758
Notes receivable, current portion 41,941 -
------------- -------------
Total current assets 7,192,092 6,508,152
PROPERTY AND EQUIPMENT, net 4,104,106 4,367,995
OTHER ASSETS
Note receivable, net of current portion 270,000 -
Other assets 82,931 75,063
------------- -------------
Total assets $ 11,649,129 $ 10,951,210
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,808,633 $ 2,018,250
Accrued and other liabilities 806,858 694,333
Line of credit 469,475 141,345
Current portion of long-term debt 571,707 472,824
Deferred income taxes 38,573 -
------------- -------------
Total current liabilities 3,695,246 3,326,752
NONCURRENT LIABILITIES
Long-term debt, net of current portion 528,687 1,169,454
Deferred rent 133,568 121,911
Deferred income taxes 347,609 197,182
------------- -------------
Total liabilities 4,705,110 4,815,299
Commitments - -
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 20,000,000 shares
authorized; 4,851,669 and 4,824,669 shares issued outstanding 48,517 48,247
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 6,469,921 6,432,691
Treasury stock (19,300 and 5,000 shares of common stock at cost) (44,331) (25,000)
Accumulated earnings (deficit) 520,312 (269,627)
------------- -------------
6,944,019 6,135,911
------------- -------------
Total liabilities and stockholders' equity $ 11,649,129 $ 10,951,210
============= =============
</TABLE>
See accompanying notes to financial statements
10
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On-Site Sourcing, Inc.
STATEMENTS OF OPERATIONS
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenue $26,670,903 $25,965,723
Cost of revenue 19,368,458 21,713,453
----------- -----------
Gross profit 7,302,445 4,252,270
----------- -----------
Selling and marketing 2,703,755 2,645,776
Administrative 3,742,909 3,025,825
----------- -----------
6,446,664 5,671,601
----------- -----------
Earnings (loss) from operations 855,781 (1,419,331)
----------- -----------
Other income (expense)
Other income 348,054 229,292
Other expense, primarily interest (224,896) (236,574)
----------- -----------
123,158 (7,282)
----------- -----------
Earnings (loss) before income taxes 978,939 (1,426,613)
Income tax expense (benefit) 189,000 (429,000)
----------- -----------
Net earnings (loss) $ 789,939 $ (997,613)
=========== ===========
Basic earnings (loss) per share $ 0.16 $ (0.21)
Diluted earnings (loss) per share $ 0.16 $ (0.21)
</TABLE>
See notes to financial statements
11
<PAGE>
On-Site Sourcing, Inc.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Additional Retained
Common Common paid-in Subscriptions Treasury stock (deficit)
shares stock capital receivable (Common) earnings Total
---------- -------- ---------- -------------- -------------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
========= ======= ========== ========== ========= =========
</TABLE>
See notes to financial statements
12
<PAGE>
On-Site Sourcing, Inc.
STATEMENTS OF CASH FLOWS
Year ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities
Net earnings (loss) $ 789,939 $ (997,613)
---------------- ----------------
Adjustments to reconcile net earnings
to net cash used in operating activities
Depreciation 1,057,820 1,037,175
(Gain) loss on disposition of equipment - (29,524)
Gain on disposition of division (270,000)
Changes in assets and liabilities -
Decrease (increase) in accounts receivable, net (540,597) 64,036
Increase in prepaid supplies (52,995) (31,673)
Decrease (increase) in prepaid expenses (25,726) 79,989
Decrease (increase) in other assets (7,869) 23,719
Increase (decrease) in accounts payable - trade (209,615) 25,668
(Decrease) increase in accrued and other liabilities 112,524 (230,153)
Increase (decrease) in deferred rent 11,657 25,402
(Decrease) increase in provision for income taxes 61,943 (559,193)
Increase (decrease) in deferred taxes 189,000 130,193
---------------- ----------------
Total adjustments 264,199 535,639
---------------- ----------------
Net cash provided by (used in) operating activities 1,054,138 (461,974)
---------------- ----------------
Cash flows from investing activities
Capital expenditures (793,930) (1,090,034)
Proceeds from disposition of equipment - 9,501
Advances in connection with sale of business division (50,000)
Receipt of payments on notes receivable 8,059 -
---------------- ----------------
Net cash used in investing activities (835,871) (1,080,533)
---------------- ----------------
Cash flows from financing activities
Proceeds from sale of common stock and exercise of warrants 37,500 65,537
Proceeds of long-term debt agreements - 316,000
Net borrowings short-term debt agreement 328,130 141,345
Payments under long-term debt agreements (541,884) (471,077)
Payments for reacquisition of common stock (19,331) -
---------------- ----------------
Net cash provided by financing activities (195,585) 51,805
---------------- ----------------
NET INCREASE (DECREASE) IN CASH 22,682 (1,490,702)
AND CASH EQUIVALENTS
Cash and cash equivalents, beginning - 1,490,702
---------------- ----------------
Cash and cash equivalents, end $ 22,682 $ -
================ ================
</TABLE>
(continued)
13
<PAGE>
On-Site Sourcing, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Supplemental disclosure of cash flow activities
Interest paid $ 181,714 $ 194,585
========== ==========
Income taxes paid - -
========== ==========
Noncash investing and financing activities:
Fixed assets acquired under capital lease obligations $ - $ 269,508
========== ==========
Fixed assets acquired through long-term debt $ - $ 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 $ -
========== ==========
</TABLE>
See notes to financial statements
14
<PAGE>
On-Site Sourcing, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
1. ORGANIZATION
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
facilities management, litigation copying, and related services at customer
and company locations. The 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.
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 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 accounts in the 1998 financial statements have been reclassified to
conform with the 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, deferred rent installment sales and net
operating loss carryforwards.
15
<PAGE>
On-Site Sourcing, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 fifteen years for financial
reporting purposes. Accelerated methods are used for tax purposes.
Effective January 1, 1999, the Company increased its estimate of the useful
life of certain 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.
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.
<TABLE>
<CAPTION>
Year ended December 31
1999 1998
------------------- ------------------
<S> <C> <C>
Net earnings (loss) available for common shareholders (A) $ 789,939 $ (997,613)
Average outstanding:
Common stock (B) 4,838,727 4,818,220
Employee stock options 71,197 -
Common stock and common stock equivalents (C) 4,909,924 4,818,220
Earnings (loss) per share:
Basic (A/B) $ .16 $ (0.21)
Diluted (A/C) $ .16 $ (0.21)
</TABLE>
Unexercised employee stock options to purchase 999,971 and 1,675,360 shares of
the Company's common stock as of December 31, 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.
16
<PAGE>
On-Site Sourcing, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 and cash. The Company places its cash with creditworthy, high
quality financial institutions. 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.
17
<PAGE>
On-Site Sourcing, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
3. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at December 31, :
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Trade receivables $ 6,979,040 $ 6,306,209
Other receivables 28,000 220,152
Allowance for uncollectible accounts (544,416) (604,333)
----------------- -----------------
$ 6,462,624 $ 5,922,028
================= =================
OTHER ASSETS
Other assets consist of the following at December 31, :
1999 1998
----------------- -----------------
Deposits $ 67,756 $ 47,389
Employee advances 15,175 27,674
----------------- -----------------
$ 82,931 $ 75,063
================= =================
PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, :
1999 1998
----------------- -----------------
Copiers $ 3,609,823 $ 3,560,647
Computers, equipment and other 3,428,547 2,683,792
Vehicles 332,551 332,551
Accumulated depreciation (3,266,815) (2,208,995)
----------------- -----------------
$ 4,104,106 $ 4,367,995
================= =================
</TABLE>
Depreciation expense charged to operations was $1,057,820 and $1,037,175 for the
years ended December 31, 1999 and 1998, respectively.
18
<PAGE>
On-Site Sourcing, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
3. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS (CONTINUED)
ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities consist of the following at December 31, :
<TABLE>
<CAPTION>
1999 1998
------------------- ------------------
<S> <C> <C>
Accrued salaries, commissions, taxes and fringe benefits $ 459,192 $ 484,732
Accrued sales tax payable 155,670 109,581
Other accrued liabilities 191,996 100,021
------------------- ------------------
$ 806,858 $ 694,334
=================== ==================
</TABLE>
4. SEGMENT INFORMATION
The Company's reportable segments are strategic business units that offer
different products and services. The Company has two reportable segments:
reprographics and facilities management services. 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 include information technology and imaging
services. During 1999, the company sold the information technology business
segment (note 12).
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.
19
<PAGE>
On-Site Sourcing, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
4. SEGMENT INFORMATION (CONTINUED)
Revenue and profit by reportable segment for the years ended December 31, 1999
and 1998 are as follows:
<TABLE>
<CAPTION>
Reprographic services Facilities management services
------------------------------------- --------------------------------------
1999 1998 1999 1998
------------------ ------------------ ------------------- ------------------
<S> <C> <C> <C> <C>
Revenue $ 20,250,011 $ 20,447,165 $ 3,222,480 $ 4,002,208
Segment profit 2,873,962 $ 1,264,860 685,706 459,702
</TABLE>
A reconciliation of segment revenue and profit to total revenue and earnings
(loss) from operations is as follows:
<TABLE>
<CAPTION>
1999 1998
------------------- ------------------
<S> <C> <C>
Revenue
Total revenue for reportable segments $ 23,472,491 $ 24,449,373
Other revenue 3,198,412 1,516,350
------------------- ------------------
Total revenue $ 26,670,903 $ 25,965,723
=================== ==================
Profit or loss
Total profit for reportable segments $ 3,559,668 $ 1,724,562
Other loss (2,703,887) (3,143,893)
------------------- ------------------
Earnings (loss) before other income, interest expense and
income taxes $ 855,781 $ (1,419,331)
=================== ==================
</TABLE>
5. LINE OF CREDIT
At December 31, 1999 and 1998, the Company had available a working capital
line of credit with a financial institution in the amount of $2,500,000.
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, 2000 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% (8.08% at December 31, 1999). As of December 31, 1999 and 1998,
there were $469,475 and $141,345 advances made under this agreement,
respectively.
20
<PAGE>
On-Site Sourcing, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
6. LONG-TERM DEBT
Long-term debt is as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------
<S> <C> <C>
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 March 2001. $ 343,750 $ 618,750
Equipment note at 8.75%, collateralized by the equipment, payable in
equal aggregate monthly installments of $5,594 plus interest, maturing
in December 2001. 139,416 203,919
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. 21,518 31,954
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. 23,412 35,752
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. 210,124 282,235
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. 17,455 21,208
Capital leases obligations (see note 7) 344,719 448,460
-------------------- --------------
1,100,394 1,642,278
Less current maturities included in current liabilities (571,707) (472,824)
-------------------- --------------
$ 528,687 $ 1,169,454
==================== ==============
</TABLE>
21
<PAGE>
On-Site Sourcing, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
6. LONG-TERM DEBT (CONTINUED)
Aggregate maturities for long-term debt is as follows:
Year ending December 31, 2000 $ 571,707
2001 372,230
2002 125,391
2003 31,066
------------------
$ 1,100,394
==================
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. On March 1, 2000 the company entered into a new
lease agreement for office space in Atlanta, GA, and terminated the
existing lease. The new lease provides for fixed escalations in payments
over the lease term through 2005.
Minimum annual rental and lease commitments for leases with a remaining
term of one year or more at December 31, 1999, are as follows:
<TABLE>
<CAPTION>
Year ending December 31, Capital leases Operating leases
- ------------------------------------------------------------------- ------------------- --------------------
<S> <C> <C>
2000 $ 152,510 $ 865,739
2001 143,735 692,840
2002 81,832 600,936
2003 27,308 480,059
2004 - 407,578
Thereafter - 733,840
------------------- --------------------
Total minimum lease payments 405,385 $ 3,708,992
=====================
Less: interest 60,666
-------------------
Present value of net minimum lease payments $ 344,719
===================
</TABLE>
22
<PAGE>
On-Site Sourcing, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
7. LEASES (CONTINUED)
Fixed assets recorded under capital leases as of December 31, 1999 and
December 31, 1998, total approximately $659,000 each year, representing
reprographic machines, and computer equipment. Interest expense on the
outstanding obligations under capital leases was approximately $45,717 and
$15,400 for the years ended December 31, 1999 and 1998, respectively.
Rent expense was $2,243,190 and $1,488,294 for the years ended December 31,
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.
- During 1998, the Company billed a shareholder and former officer
approximately $16,500 for reprographic services.
- During 1998, the Company incurred approximately $40,000 for legal
services rendered by a shareholder and former officer.
- During 1996, the Company entered into a note agreement with a former
officer/shareholder in the amount of $25,000. The loan bore interest
at the prime rate of interest at the date of the loan (8.25%). All
unpaid principal and accrued interest was repayable in September 1998.
In November 1998, the Company repurchased shares of common stock in
satisfaction for the note receivable.
- In March 1996, the Company loaned $89,900 to Allen Outlaw. The
loan bears interest at 6% per year. The balance of $50,400 at December
31, 1999 is due April 1, 2000.
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.
23
<PAGE>
On-Site Sourcing, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 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 pro forma amounts indicated
below:
<TABLE>
<CAPTION>
Net income (loss): 1999 1998
------------------ -------------------
<S> <C> <C>
AS REPORTED $ 789,939 $ (997,613)
Pro forma 634,985 (1,225,712)
Net income (loss) per common share - Basic:
AS REPORTED .16 (0.21)
Pro forma .13 (0.25)
Net income (loss) per common share - Diluted:
AS REPORTED .16 (0.21)
Pro forma .13 (0.25)
</TABLE>
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 1999 and 1998, respectively, were used: expected dividend
yields of 0.0% and 0.0%, expected volatility rates of 72% and 48%,
risk-free rates of 4.6% and 5.5% and expected lives of 1 to 4 years.
At December 31, 1999 and 1998, the Company had outstanding options to sell
469,825 and 434,937 shares, respectively, of common stock to officers and
directors at exercise prices ranging from $1.11 to $3 per share. The
options expire through 2002.
During 1999 and 1998, the Company granted options for 161,000 and 1,182,285
shares of common stock, respectively, at exercise prices ranging from $1.13
to $3.44 per share, respectively. The grant price per share was equal or
greater than the market price at the date of grant. During 1999, options
for 630,402 shares of common stock expired and 27,000 were exercised. As of
December 31, 1998, options for 781,885 of the shares are vested and
outstanding. As of December 31, 1999, options for 795,442 of the shares are
vested with the remainder scheduled to vest through October 2002. The
options expire through October 2006.
24
<PAGE>
On-Site Sourcing, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
10. INCENTIVE STOCK OPTION PLAN (CONTINUED)
The following depicts activity in the plan for two years ended December 31,
1999:
<TABLE>
<CAPTION>
Options outstanding
Per share
Shares exercise prices
------------------ -------------------
<S> <C> <C>
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
================== ===================
</TABLE>
11. INCOME TAXES
The amounts and sources of the provision for deferred income tax expense
(benefit) were as follows for the year ended December 31,:
<TABLE>
<CAPTION>
1999 1998
------------------ -------------------
<S> <C> <C>
Current
Federal $ 52,147 $ (447,424)
State 9,796 (111,769)
------------------ -------------------
61,943 (559,193)
Deferred
Federal 104,966 103,731
State 22,091 26,462
------------------ -------------------
$ 189,000 $ (429,000)
================== ===================
</TABLE>
25
<PAGE>
On-Site Sourcing, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 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:
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
<S> <C> <C>
Excess of tax over financial accounting depreciation $ 385,724 $ 365,477
Loss carryforwards (79,531) (138,315)
Other 79,989 (29,980)
------------------ ------------------
Deferred tax liability $ 386,182 $ 197,182
================== ==================
</TABLE>
Beginning in 1998, the Company is 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. The income tax
payable was offset by net operating loss carryforwards. At December 31,
1999, the company had approximately $197,000 of operating loss carry
forwards that expire in 2014.
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, 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, 1999, $270,000 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
accrues interest at 8% per annum and is payable in monthly principal and
interest installments until maturity in September 2000. At December 31,
1999, $41,941 remains payable to the Company.
26
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS
The following individuals are the Directors and Officers of the Company.
All Directors are elected annually by the shareholders to serve until the
next annual meeting of shareholders and until their successors are duly
elected and qualified. Officers are elected annually by the Board of
Directors to serve at the pleasure of the Board.
<TABLE>
<CAPTION>
NAME AGE POSITION
----------------------------- ----- ---------------------------------
<S> <C> <C>
President, Chief Executive Officer and Chairman
Christopher J. Weiler 37 of the Board
Allen C. Outlaw 34 Executive Vice President-Marketing and Director
Alfred Duncan 56 Executive Vice President/ Chief Financial Officer
John Sabanosh 49 Vice President-Finance
Charles B. Millar 39 Director
Jorge R. Forgues 44 Director
Denis Seynhaeve 44 Director
</TABLE>
CHRISTOPHER J. WEILER founded the Company with in December 1992 and has
been President, Chief Executive Officer and a director of the Company 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. before
joining Pitney Bowes Management Services in 1991. Since 1998, Mr. Weiler
has served as Chairman of the Board.
ALFRED DUNCAN joined the Company as Executive Vice President and Chief
Financial Officer in July 1998. From June 1997 until July 1998, Mr Duncan
served as Vice President and Chief Financial Officer of Meadowlanders,
Inc., owners of the New Jersey Devils, a National Hockey League team. From
1992 until June 1997, Mr. Duncan was an independent management consultant
to the computer, software and consumer electronics industries. Mr. Duncan
holds a BSCE from Duke University and an MBA from Harvard University.
ALLEN C. 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.
JOHN SABANOSH has been the Vice President of Finance since June 1998. Prior
thereto, 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.
CHARLES B. MILLAR has served as a Senior Vice President of the Washington
D.C. investment banking firm of Johnston, Lemon & Co., Inc. since 1991. Mr.
Millar joined the Board of Directors, Compensation and Audit Committees in
August 1996.
27
<PAGE>
JORGE R. FORGUES has the position of Vice President - Finance, Latin
America for PSINet, Inc. Prior thereto, from 1996 to 1998, Mr. Forgues
served in the positions of Senior Vice President of Finance and
Administration, Chief Financial Officer and Treasurer of Treev Corporation
(formerly Network Imaging Corporation), a Herndon, Virginia based publicly
traded software developer. From October 1993 to April 1996, Mr. Forgues was
Vice President of Finance and Administration, Chief Financial Officer and
Treasurer of Globalink, a Fairfax-based, publicly-traded, machine
translation software company. []From 1992 to 1993, Mr. Forgues was the
Director of Accounting for Spirit Cruises, a harbor cruise line with
operations in nine states. Prior thereto, from 1987 to 1992, Mr. Forgues
was Vice President of Finance at Best Software, Inc., a computer software
developer.] Mr. Forgues joined the Board of Directors, Compensation and
Audit Committees in July 1996.
Messrs. Charles Millar and Jorge Forgues are the members of the Audit
Committee of the Board of Directors. Messrs. Christopher Weiler, Charles
Millar and Jorge Forgues are the members of the Compensation Committee of
the Board of Directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
To the best of the Company's knowledge, in 1999, all Officers, Directors
and 10% shareholders have filed, on a timely basis, all forms required by
Section 16(a) of the Exchange Act of 1934.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation of the Company's Chief Executive Officer and the other most
highly compensated executive officers (collectively, the "Named Executive
Officers") whose annual compensation (salary and bonus) for services
rendered in all capacities to the Company exceeded $100,000 for the years
ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
- --------------------------------------------------------------------------------------------------------------------------------
Other All
Annual Other
Name and Principal Position Compensation Options/ Compensation
Salary Bonus $ SAR's $
Year $ $ (Shares)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Christopher Weiler 1999 150,707 15,000 - - -
-----------------------------------------------------------------------------------------------
President and CEO 1998 145,145 - - 4,225 -
-----------------------------------------------------------------------------------------------
1997 118,917 20,000 - - -
- --------------------------------------------------------------------------------------------------------------------------------
Alfred Duncan 1999 128,592 - - 10,000 -
-----------------------------------------------------------------------------------------------
Executive VP/Chief Financial
Officer 1998 78,267 - - 84,225 -
-----------------------------------------------------------------------------------------------
1997(2) - - - - -
- --------------------------------------------------------------------------------------------------------------------------------
John Sabanosh 1999 112,146 - - 15,000 -
-----------------------------------------------------------------------------------------------
Vice President - Finance 1998 50,829 53,375
-----------------------------------------------------------------------------------------------
1997(2) - - - - -
- --------------------------------------------------------------------------------------------------------------------------------
Lance Waagner, VP - 1999(1) 109,383 - - - -
-----------------------------------------------------------------------------------------------
Information Technology 1998 148,754 - - 77,500 -
-----------------------------------------------------------------------------------------------
1997 - - - - -
- --------------------------------------------------------------------------------------------------------------------------------
Allen Outlaw 1999 304,709 - - - -
-----------------------------------------------------------------------------------------------
Executive VP, Marketing 1998 222,604 - - 107,800 -
-----------------------------------------------------------------------------------------------
1997 99,028 - - - -
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Waagner terminated his employment with the Company effective September
30, 1999.
(2) Mr. Duncan and Mr. Sabanosh joined the Company in 1998
DIRECTOR COMPENSATION
Directors currently receive no cash compensation for serving on the Board of
Directors other than reimbursement of reasonable expenses incurred in attending
meetings. For 1998 and 1999, three outside directors each received options to
purchase 40,000 and 10,000, respectively, shares of Common Stock vesting over a
period of three years in equal portions at the end of each quarter.
The options were granted at the market price at the time of grant.
28
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table enumerates, as of December 31, 1999, the name and
ownership, both by numerical holding and percentage interest, of the
Company's common stock by (1) each person or group, known to the Company,
who beneficially owns more than 5 percent of the Company's outstanding
common stock; (2) the Directors and Executive Officers of the Company,
individually, and (3) the Directors and Executive Officers as a group.
In preparing the following tables, the Company has relied upon statements
filed with the Securities and Exchange Commission by beneficial owners of
more than 5 percent of the Company's outstanding common stock pursuant to
Section 13(d) or 13(g) of the Securities Act of 1934, unless the Company
knew or had reason to believe that the information contained in such
statements was not complete or accurate, in which case the Company relied
upon information which it considered to be accurate and complete.
<TABLE>
<CAPTION>
NAME # OF SHARES APPROXIMATE % OF BENEFICIAL
BENEFICIALLY OWNED OWNERSHIP (1)
------------------ ---------------------------
<S> <C> <C>
Denis A. Seynhaeve (2) 547,000 9.5%
220 Wardour Drive
Annapolis, MD 21401
Christopher J. Weiler (3) 364,225 6.3%
c/o the Company
Allen C. Outlaw (4) 264,800 4.6%
c/o the Company
Alfred Duncan (5) 88,225 1.5%
c/o the Company
Charles B. Millar (6) 77,934 1.4%
1101 Vermont Ave., N.W.
Washington, D.C. 20005
Jorge R. Forgues (7) 74,434 1.3%
500 Huntmar Park Drive
Herndon, VA 20170
John Sabanosh (8) 62,825 1.1%
c/o the Company
All Officers and Directors as a group 1,479,443 25.7%
</TABLE>
- -----------
(1) Based on 4,851,669 shares of Common Stock outstanding as of December 31,
1999 and 910,612 shares of vested exercisable options.
(2) Includes 10,000 shares subject to options that are exercisable currently or
exercisable within 90 days.
(3) Includes 4,225 shares subject to options that are exercisable currently or
exercisable within 90 days.
(4) 162,000 shares are held by escrow agent pursuant to the Promissory Note and
Escrow Agreement. See "Interest of Management and others in Certain
Transactions - Loans and Guarantees". Includes 57,800 shares subject to
options that are exercisable currently or exercisable within 90 days.
(5) Includes 88,225 shares subject to options that are exercisable currently or
exercisable within 90 days.
(6) Includes 74,434 shares subject to options that are exercisable currently or
exercisable within 90 days.
(7) Includes 74,434 shares subject to options that are exercisable currently or
exercisable within 90 days.
(8) Includes 59,825 shares subject to options that are exercisable currently or
exercisable within 90 days.
29
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1998, the Company granted options to purchase 40,000 shares of the
Company's common stock at $3.00 per share to each of the Company's three
outside directors. The options vest in equal quarterly installments over a
period of one year. At the date of the grant, these options were granted on
terms no less favorable to the Company than those available to unaffiliated
parties purchasing Shares of the Company's common stock.
During 1998, the Company granted options to purchase 277,237 shares of the
Company's common stock at exercise prices ranging from $1.13 to $2.88 to
five officers of the Company. The options vest in equal quarterly
installments over a period of one to three years. At the date of the grant,
these options were granted on terms no less favorable to the Company than
those available to unaffiliated parties purchasing Shares of the Company's
common stock.
During July 1999, the Company granted options to purchase 10,000 shares of
the Company's common stock at $1.38 per share to each of the Company's
three outside directors. The options vest in equal quarterly installments
over a period of one year. At the date of the grant, these options were
granted on terms no less favorable to the Company than those available to
unaffiliated parties purchasing Shares of the Company's common stock.
During 1999, the Company granted options to purchase 25,000 shares of the
Company's common stock at exercise prices ranging from $1.38 to $1.44 to
two officers of the Company. At the date of the grant, these options were
granted on terms no less favorable to the Company than those available to
unaffiliated parties purchasing Shares of the Company's common stock.
In connection with the Company's Initial Public Offering in 1996, the
underwriter was granted 96,000 units, each consisting of two shares of the
Company's common stock, $0.01 par value, and one common stock purchase
warrant, at an exercise price of $8.45. In March 1999, the Company repriced
each unit held by the underwriter at $3.50. There was no material impact to
the financial position of the Company.
LOANS AND GUARANTEES
In March 1996, the Company loaned $89,900 to Allen Outlaw, an officer/
director. The loan bears interest at 6%. The balance due at December 31,
1999 was $50,400.
30
<PAGE>
ITEM 13. EXHIBITS, REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT # DESCRIPTION OF DOCUMENT
- --------- -----------------------
<S> <C>
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
10.02(1) Employment Agreement between the Company and Allen Outlaw
10.03(1) Employment Agreement between the Company and Anthony Kopsidas
10.04(1) Employment Agreement between the Company and Jack Krutsick
10.05(2) Employment Agreement between the Company and Larry F. Morris
10.05(3) Employment Agreement between the Company and Joseph Sciacca
10.06(1) Lease with Rubin Strouse Realty for Philadelphia, PA
10.07(1) Amendment 1 to Lease with Rubin Strouse Realty
10.08(1) Amendment 2 to Lease with Rubin Strouse Realty
10.09(1) Amendment 3 to Lease with Rubin Strouse Realty
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
10.15(1) Lease Agreement between Oak Crest Ltd. and SWR 1/31/92 for Frederick, MD assumed by On-Site
10.16(1) Assumption of Lease Agreement between the Company and Oak Crest Ltd.
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
31
<PAGE>
10.20(5) Lease with JRG/Lynn Associates 10/18/96
10.21(5) Lease with Frederick Park Limited Partnership
10.22(5) Fifth Amendment to Lease with Suburban Station Associates
10.23(2) Revised 1996 Stock Option Plan
10.24(2) 1997 Stock Option Plan
10.25(5) First Amendment to lease with Kingston Atlanta Partners, L.P.
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
10.32 Employment Agreement with Edward Hook
10.33 Employment Agreement with Jack Sabanosh
16.01(4) Letter on change in certifying accountant
23. Accountants Consents
23.1 Consent of Reznick Fedder & Silverman P.C.*
27.01 Financial Data Schedule
</TABLE>
(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
* Filed Herewith. All other exhibits have been previously filed as indicated
(B) REPORTS ON FORM 8-K
None
32
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized on this 30th day of March 2000.
ON-SITE SOURCING, INC.
BY: /s/ Christopher J. Weiler
---------------------------------
Christopher J. Weiler, President
In accordance with the Exchange, this Report has been signed below by the
following persons on behalf of the Registrant, and in the capacities and on the
date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ CHRISTOPHER J. WEILER President, Chief Executive
- ------------------------ Officer and Director March 30, 2000
Christopher J. Weiler
/s/ ALFRED DUNCAN
- ------------------------
Alfred Duncan Chief Financial Officer March 30, 2000
/s/ ALLEN OUTLAW Executive Vice President/Director March 30, 2000
- ------------------------
Allen Outlaw
/s/ CHARLES B. MILLAR Director March 30, 2000
- ------------------------
Charles B. Millar
</TABLE>
33
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement No.
333-77625 on Form S-8 of On-Site Sourcing, Inc. of our report dated January 31,
2000, except for note 7 which is dated March 1, 2000, relating to the balance
sheets of On-Site Sourcing, Inc. as of December 31, 1999 and 1998, and the
related statements of operations, stockholders' equity and cash flows for the
years then ended, which report appears in the December 31, 1999 annual report on
Form 10-KSB of On-Site Sourcing, Inc.
/s/ Reznick Fedder & Silverman
Bethesda, Maryland
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 22682
<SECURITIES> 0
<RECEIVABLES> 6504565
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7192092
<PP&E> 4104106
<DEPRECIATION> 0
<TOTAL-ASSETS> 11649129
<CURRENT-LIABILITIES> 3695246
<BONDS> 0
0
0
<COMMON> 48517
<OTHER-SE> 6895502
<TOTAL-LIABILITY-AND-EQUITY> 11649129
<SALES> 26670903
<TOTAL-REVENUES> 26670903
<CGS> 19368458
<TOTAL-COSTS> 25815122
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 224896
<INCOME-PRETAX> 978939
<INCOME-TAX> 189000
<INCOME-CONTINUING> 789939
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 789939
<EPS-BASIC> .16
<EPS-DILUTED> .16
</TABLE>
