OSRC .02, 10k out.Turned to profit for the whole year.
Summary of Operations
Operating results have improved in the year ended December 31, 2002 compared to the year ended December 31, 2001. The following table summarizes the comparative operating results for the two periods:
Summary of Operations 2002 2001
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Revenues $2,958,871 $ 2,774,947
Cost of Revenue 1,928,071 1,854,820
Gross Margin 1,030,800 920,127
Selling, General and Administrative Costs 838,876 1,476,273
Operating Income (Loss) before Discontinued Operation 191,924 (556,146)
Other Income (Expense) (176,311) (153,139)
Subscription Receivable Write-off, net of income tax - (800,000)
Extraordinary Gain - 62,650
Loss from discontinued operations - (73,260)
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Net Income (Loss) $ 15,614 $(1,519,895)
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Fiscal 2002 results reflect management's changed focus and strategic emphasis for the Company. Operations for the year ended December 31, 2002 show significantly improved results with Net Income of $15,614 compared to a Net Loss of $1,519,895 for the year ended December 31, 2001.
While consolidated revenues increased slightly by about six percent (6%) in 2002 compared to 2001, consolidated cost of revenues increased only four percent (4%) resulting in a twelve percent (12%) increase in gross profit for the year ended December 31, 2002 compared to the year ended December 31, 2001. Changes implemented early in the second quarter of 2002 started to show improvement by the end of the year as gross margins of the maintenance division had increased significantly to 34% by the end of 2002 versus 23% during the first quarter of 2002. Management will continue to focus on this aspect of the service operations in order to continue to bring down parts usage costs To further control costs of the maintenance operations the Company eliminated certain non-profitable contracts during the year ended December 31, 2002.
The most significant factor contributing to the improved overall operating results is the forty-three percent (43%) decrease in selling, general and administrative costs for the year ended December 31, 2002 compared to 2001. While the approximately $637,000 decrease is substantial, the Company continues to incur high selling, general and administrative costs as a percent of revenues and management continues to focus on implementing measures to bring these costs more in line with the Company's business model.
In April 2001 the Company discontinued the operations of its integration subsidiary because its activities were concentrated in the highly competitive and low margin network hardware sales and integration industry, and drained resources from the Company's core equipment maintenance and installation divisions. The net effects of discontinued operations are shown separately in the Consolidated Statement of Operations for the years ended December 31, 2002 and 2001.
Revenues
Consolidated revenues increased slightly in the year ended December 31, 2002 compared to the same period in 2001 as a result of increased revenues in the maintenance divisions. Supply division revenues fell nine (9%) compared to 2001, below forecasted results in 2002, although the maintenance division met forecasted expectations. The following table details maintenance and supply division revenues for 2002 & 2001:
Revenues 2002 2001
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Maintenance $ 2,137,754 $ 1,872,471
Supplies 821,117 902,476
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Total $ 2,958,871 $ 2,774,947
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The final phase of the Company's restructuring and realignment of its maintenance division was implemented in the fourth quarter of 2001. The full benefit of these changes, while not fully evident yet, are showing very positive trends as of the end of 2002. As part of this restructuring, the General Manager(GM) of the supply division assumed oversight responsibility for all maintenance operations in the first quarter of 2002 in addition to his supply division responsibilities. Management believes the focus the GM put on restructuring the maintenance division adversely impacted supply division sales early in the year. However, supply division revenues began to return to their historical higher levels in the fourth quarter.
The fourteen percent (14%) increase in maintenance revenues during 2002 is the result of added service commitments from existing customers and reflects the positive benefits of changes the Company has implemented that have improved maintenance customer satisfaction levels to the highest in the Company's history. This added business increased the concentration of the Company's revenues with the Kroger Corporation to fifty-seven (57%) percent of total revenues. Installation services were suspended in early fiscal 2001 so management could focus the Company's limited resources on improving and strengthening the Company's core maintenance and supplies division operations. To the degree installation opportunities arise in line with present geographic and staffing resources the Company will pursue and engage them but in the near-term management is concentrating on the maintenance and supplies divisions. Now that operational efficiencies and customer satisfaction levels are substantively improved management is focusing greater attention growing revenues of these divisions via both current account extensions as well as through out-bound sales and marketing efforts.
Supply division revenues decreased nine percent (9%) in 2002 compared to 2001, which was significantly less than management had forecasted for the division. In addition to the added responsibilities of the division's GM noted above, supply division revenues were also adversely affected by pricing errors of newly added products during the period. These pricing problems have been corrected and additional controls put in place so results should improve in prospective quarters. By the end of June, the division's web-based distribution delivery system was completely on line and will significantly enhance division revenue expansion to existing as well as potential new accounts. In early September, the division acquired the business of EON Supply, a large new customer , which also entered into a service agreement with the company's maintenance division. Although it is too early to see the full impact of this new account, management believes it will contribute significantly to revenues and cash flow.
Cost of Revenues and Gross Margins
Consolidated gross margins for the year ended December 31, 2002 were slightly higher compared to 2001. Gross margins for 2002, while slightly increased from 2001 , improved significantly from the first quarter to the fourth quarter to thirty five percent (35%) versus twenty-eight percent (28%). Inventory control and management issues related to the continuing restructuring changes in the maintenance division and problems with inventory and remanufacturing controls in the supply division accounted for the lower margins early in 2002 versus 2001. However, the improvement in gross margins towards the end of the year confirms the positive effects of the restructuring changes. Once the effects of these changes are fully rooted management believes margins will return to their historically higher levels. These improvements focus on strengthening management oversight and information system and process infrastructures to assure better inventory control in the supply division and more efficient call routing and dispatch controls in the maintenance division.
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Selling, General and Administrative Costs
Improvements continued in this category of costs in 2002 as management continued to reduce these costs to levels more in line with the Company's present level of operations. Consolidated S, G&A costs decreased approximately $637,000 over prior year, a forty-three percent (43%) decrease . These costs were twenty-eight percent (28%) of gross revenues in 2002 compared to fifty-three percent (53%) in 2001 and were slightly below the Company's forecasted thirty percent ( 30%). This was achieved through strict cost controls and reductions implemented during the later part of 2002.
Even though significant reductions have already been achieved in each expense category, management believes there are additional opportunities for further cuts. Management is focused, however, on growing revenues while holding the present level of overhead costs steady. The following table details the significant components of general and administrative costs :
General and Administrative 2002 2001
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Salaries, Wages and Benefits $ 469,659 $ 744,288
Facilities 153,571 200,876
Legal and Professional 97,536 142,005
Telecommunication Costs 72,334 63,341
Travel and Entertainment 22,626 33,042
Other 1,226 136,325
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Total $ 816,953 $ 1,319,877
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