<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 5, 1998
REGISTRATION NO. 333-57209
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
OUTSOURCING SERVICES GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 7839 33-0597491
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification
Organization) Number)
</TABLE>
--------------------------
425 SOUTH NINTH AVENUE
CITY OF INDUSTRY, CALIFORNIA 91746
(626) 968-8531
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
JOSEPH W. SORTAIS
CHIEF FINANCIAL OFFICER AND SECRETARY
OUTSOURCING SERVICES GROUP, INC.
425 SOUTH NINTH AVENUE
CITY OF INDUSTRY, CALIFORNIA 91746
(626) 968-8531
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
--------------------------
COPIES TO:
JEROME L. COBEN, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
300 SOUTH GRAND AVENUE
LOS ANGELES, CALIFORNIA 90071
(213) 687-5000
--------------------------
<TABLE>
<CAPTION>
JURISDICTION PRIMARY STANDARD I.R.S. EMPLOYER
NAME OF ADDITIONAL OF INDUSTRIAL CLASSIFICATION IDENTIFICATION
REGISTRANTS* INCORPORATION NUMBER NUMBER
- ----------------------------- ------------- -------------------------- --------------------
<S> <C> <C> <C>
Aerosol Services Company, California 7839 33-0597492
Inc.
Kolmar Laboratories, Inc. Delaware 2844 14-1439595
Piedmont Laboratories, Inc. Georgia 7839 59-2539969
</TABLE>
- --------------------------
* Address and telephone number of principal executive offices are the same as
those of Outsourcing Services Group, Inc.
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 5, 1998
PROSPECTUS
OFFER TO EXCHANGE
10 7/8% SENIOR SUBORDINATED NOTES DUE 2006 FOR
10 7/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2006
OF
OSG OUTSOURCING SERVICES GROUP, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1998, UNLESS EXTENDED.
--------------------------
Outsourcing Services Group, Inc. ("OSG" or the "Company") hereby offers,
upon the terms and subject to the conditions set forth in this prospectus (this
"Prospectus") and the accompanying Letter of Transmittal (the "Letter of
Transmittal," which together with this Prospectus constitute the "Exchange
Offer"), to exchange an aggregate principal amount of up to $105,000,000 of its
10 7/8% Series B Senior Subordinated Notes due 2006 (the "New Notes"), which
have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), for a like principal amount of its issued and outstanding
10 7/8% Senior Subordinated Notes due 2006 (the "Old Notes" and, together with
the New Notes, the "Notes") from the holders (the "Holders") thereof. The terms
of the New Notes are identical in all material respects to the Old Notes except
(i) that the New Notes have been registered under the Securities Act, (ii) for
certain transfer restrictions and registration rights relating to the Old Notes
and (iii) that the New Notes will not contain certain provisions relating to
Liquidated Damages (as defined) to be paid to Holders of Old Notes under certain
circumstances relating to the timing of the Exchange Offer and other
registration requirements. The Company issued $105,000,000 aggregate principal
amount of Old Notes on March 3, 1998 pursuant to exemptions from, or
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws (the "Offering").
Interest on the Notes will be payable semiannually in arrears on March 1 and
September 1 of each year, commencing September 1, 1998, at the rate of 10 7/8%
per annum. For each Old Note accepted for exchange, the Holder of such Old Note
will receive a New Note having a principal amount equal to that of the
surrendered Old Note. The New Notes will bear interest from the most recent date
to which interest has been paid on the Old Notes or, if no interest has been
paid on the Old Notes, from March 3, 1998. Old Notes accepted for exchange will
cease to accrue interest from and after the date of consummation of the Exchange
Offer. Holders of Old Notes whose Old Notes are accepted for exchange will not
receive any payment in respect of accrued interest on such Old Notes. The Notes
are redeemable in whole or in part, at the option of the Company, on or after
March 1, 2003 at the redemption prices set forth herein plus accrued and unpaid
interest to the redemption date. In addition, at any time on or prior to March
1, 2001, the Company, at its option may redeem up to 35% of the aggregate
principal amount of the Notes originally issued with the net cash proceeds of
one or more Equity Offerings (as defined), at the redemption price equal to
110.875% of the aggregate principal amount to be redeemed plus accrued and
unpaid interest to the redemption date; PROVIDED that at least 65% of the
aggregate principal amount of the New Notes issued hereunder together with the
Old Notes originally issued and not exchanged in the Exchange Offer remains
outstanding immediately after any such redemption.
The Old Notes, are and the New Notes will be, unsecured senior subordinated
obligations of the Company and the Old Notes are, and the New Notes will be,
subordinated in right of payment to all existing and future Senior Debt (as
defined) of the Company. The Old Notes are, and the New Notes will be,
effectively subordinated to all secured indebtedness of the Company to the
extent of the assets securing such indebtedness. The Old Notes are, and the New
Notes will be, guaranteed on a full, unconditional, joint and several and
unsecured senior subordinated basis (the "Guarantees") by each of the current
United States subsidiaries, all of which are wholly-owned by the Company, and
certain future subsidiaries of the Company (the "Guarantors"). Each of the
Guarantees will be effectively subordinated to all secured indebtedness of such
Guarantor to the extent of the assets securing such indebtedness. The Old Notes
and the Guarantees rank PARI PASSU with, and the New Notes and their Guarantees
will rank PARI PASSU with, any future senior subordinated indebtedness of the
Company or the Guarantors, respectively and rank or will rank, as the case may
be, senior in right of payment to all other subordinated obligations of the
Company or the Guarantors, respectively. As of June 27, 1998, neither the
Guarantors nor the Company had outstanding Guarantor Senior Debt (as defined) or
Senior Debt, respectively, and the Guarantors had approximately $52.1 million of
availability under the Senior Secured Credit Facility (as defined). In addition,
as of June 27, 1998, the Company's subsidiaries that are not Guarantors had
approximately $5.9 million of indebtedness and accrued liabilities, including
trade payables, which are structurally senior to the Notes. See "Description of
Notes."
Upon the occurrence of a Change of Control (as defined), each holder of
Notes will have the right to require that the Company purchase all or a portion
of such holder's Notes at a purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest to the date of purchase. In addition,
the Company will be obligated to offer to purchase the Notes at 100% of the
principal amount thereof, plus accrued and unpaid interest thereon, if any, to
the date of purchase in the event of certain asset sales. See "Description of
Notes."
--------------------------
SEE "RISK FACTORS" BEGINNING AT PAGE 16 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS PRIOR TO TENDERING THEIR OLD NOTES IN THE
EXCHANGE OFFER.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
--------------------------
The date of this Prospectus is , 1998
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement (as
defined herein). Based on interpretations by the staff of the Securities and
Exchange Commission (the "Commission"), as set forth in no-action letters issued
to third parties, the Company believes that New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by Holders thereof (other than any Holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act), without compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such Holder's business and such Holder, other than
broker-dealers, has no arrangement with any person to engage in a distribution
of such New Notes. The Company has not sought and does not intend to seek its
own no-action letter in connection with the Exchange Offer and there can be no
assurance that the Commission would make a similar determination with respect to
the Exchange Offer. Each Holder, other than a broker-dealer, must acknowledge
that it is not engaged in, and does not intend to engage in, a distribution of
such New Notes and has no arrangement or understanding to participate in a
distribution of New Notes. If any holder is an affiliate of the Company and is
engaged in or intends to engage in or has any arrangement with any person to
participate in the distribution of the New Notes to be acquired pursuant to the
Exchange Offer, then such Holder (i) could not rely on the applicable
interpretations of the staff of the Commission and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives New
Notes for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes.
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 90 days after the Expiration Date (as defined herein), it will make
this prospectus available to any broker-dealer for use in connection with any
such resale. See "Plan of Distribution."
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all the expenses incident to the Exchange Offer. Tenders of Old
Notes pursuant to the Exchange Offer may be withdrawn at any time prior to the
Expiration Date. If the Company terminates the Exchange Offer and does not
accept for exchange any Old Notes, the Company will promptly return the Old
Notes to the Holders thereof. See "The Exchange Offer."
There is no existing trading market for the New Notes, and there can be no
assurance regarding the future development of a market for the New Notes. BT
Alex. Brown Incorporated ("BT") has advised the Company that it currently
intends to make a market in the New Notes. BT is not obligated to do so,
however, and any market-making with respect to the New Notes may be discontinued
at any time without notice. The Company does not intend to apply for listing or
quotation of the New Notes on any securities exchange or to register or qualify
the New Notes for offer and sale in any jurisdiction (other than the
registration of the New Notes under the Securities Act).
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
The New Notes will be available initially only in book-entry form. The
Company expects that the New Notes issued pursuant to the Exchange Offer will be
issued in the form of one or more Global Notes (as defined) that will be
deposited with, or on behalf of, the Depository Trust Company ("DTC" or the
i
<PAGE>
"Depository") and registered in its name or in the name of Cede & Co., as its
nominee. Beneficial interests in the Global Note representing the New Notes will
be shown on, and transfers thereof will be effected only through, records
maintained by the Depository and its participants. So long as DTC or its nominee
is the registered owner or holder of the Global Note, DTC or such nominee, as
the case may be, will be considered the sole owner or holder of the Notes
represented by such Global Note for all purposes under the Indenture (as
defined). Payments of the principal of, premium (if any), interest and
Liquidated Damages (if any) on, the Global Note will be made to DTC or its
nominee, as the case may be, as the registered owners thereof. None of the
Company, the Trustee (as defined) or any Paying Agent (as defined) will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Note or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interest. After the initial issuance of such Global Note,
New Notes in certificated form will be issued in exchange for the Global Note
only in accordance with the terms and conditions set forth in the Indenture. See
"Description of Notes--Book Entry; Delivery and Form."
ii
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on Form
S-4 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the New Notes
offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits thereto, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the New Notes offered hereby,
reference is made to the Registration Statement. Any statements made in this
Prospectus concerning the provisions of certain documents are not necessarily
complete and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement otherwise filed with the
Commission.
Upon the effectiveness of the Registration Statement, the Company will
become subject to the informational requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and in accordance therewith will file
reports and other information with the Commission. The Registration Statement,
the exhibits forming a part thereof and the reports and other information filed
by the Company with the Commission in accordance with the Exchange Act may be
inspected, without charge, at the Public Reference Section of the Commission
located at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the
following Regional Offices of the Commission: 7 World Trade Center, 13th Floor,
New York, New York 10048; and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of all or any portion of the material may be obtained
from the Public Reference Section of the Commission upon payment of the
prescribed fees. The Commission also maintains a site on the World Wide Web that
contains reports, proxy and information statements and other information at
HTTP://WWW.SEC.GOV.
In the event that the Company is not required to be subject to the reporting
requirements of the Exchange Act in the future, as required under the Indenture
pursuant to which the Old Notes were, and the New Notes will be, issued, the
Company has agreed that, for so long as any of the Notes remain outstanding, it
will file with the Commission (unless the Commission will not accept such a
filing) (i) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and 10-K
if the Company were required to file such forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and,
with respect to the annual information only, a report thereon by the Company's
certified independent accountants and (ii) all reports that would be required to
be filed with the Commission on Form 8-K if the Company were required to file
such reports. In addition, for so long as any of the Notes remain outstanding,
the Company has agreed to make available to any prospective purchaser of the
Notes or beneficial owner of the Notes in connection with any sale thereof the
information required by Rule 144A(d)(4) under the Securities Act.
iii
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL DATA, INCLUDING
THE "UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA," "SELECTED
HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
THE FINANCIAL STATEMENTS (AS DEFINED) INCLUDED ELSEWHERE IN THIS PROSPECTUS.
UNLESS THE CONTEXT OTHERWISE REQUIRES, (I) REFERENCES TO "OSG" AND THE "COMPANY"
REFER TO OUTSOURCING SERVICES GROUP, INC. AND ALL OF ITS SUBSIDIARIES, INCLUDING
AEROSOL SERVICES COMPANY, INC. ("ASC"), PIEDMONT LABORATORIES, INC. ("PIEDMONT")
AND KOLMAR LABORATORIES, INC. ("KOLMAR"), (II) REFERENCES TO THE KOLMAR GROUP
INCLUDE KOLMAR, KOLMAR'S WHOLLY-OWNED SUBSIDIARIES, KOLMAR DE MEXICO, S.A. DE
C.V. AND KOLMAR (AUST.) PTY. LIMITED AND KOLMAR CANADA, FORMERLY A DIVISION OF
CCL (AS DEFINED) (UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO KOLMAR
INCLUDE REFERENCES TO THE KOLMAR GROUP), (III) REFERENCES TO FINANCIAL STATEMENT
BALANCES ARE DETERMINED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP"), AND (IV) REFERENCES TO "PRO FORMA BASIS" MEAN
THE APPLICATION OF THE PRO FORMA ADJUSTMENTS DESCRIBED UNDER THE HEADING
"UNAUDITED PRO FORMA COMBINED FINANCIAL DATA." THE MARKET POSITION AND OTHER
INDUSTRY DATA CONTAINED HEREIN, BOTH WITH RESPECT TO THE UNITED STATES AND NORTH
AMERICA, HAVE BEEN DERIVED FROM INDUSTRY AND OTHER SOURCES AVAILABLE TO THE
COMPANY, INCLUDING MANAGEMENT'S INDUSTRY EXPERIENCE. WHILE MANAGEMENT BELIEVES
THAT ITS ESTIMATES DERIVED FROM SUCH SOURCES, INCLUDING AS TO MARKET POSITION,
ARE REASONABLE, NO ASSURANCES CAN BE GIVEN AS TO THE ACCURACY THEREOF.
THE COMPANY
The Company is a leading provider of outsourced manufacturing and packaging
services to the North American health and beauty aid market on the basis of
sales. Over 75% of the Company's revenues are derived from the manufacturing and
packaging of health and beauty aid products, including lipstick, face powder,
eye shadow, mascara, nail enamel, skin care cream and lotion, hair spray and
gel, shampoo and shaving cream and gel. Other products manufactured and packaged
by the Company include household and automotive products such as lubricant,
household cleaners and lighter fluid. OSG offers its customers a complete range
of services, including product conceptualization, formulation, manufacturing,
filling and packaging. It also provides ancillary services such as materials
procurement, warehousing and distribution of finished goods. The Company has
developed hundreds of proprietary products that have been placed into
distribution by its customers in national and international consumer markets.
Management estimates that a majority of the Company's revenues are derived from
products that OSG has formulated. The Company has six manufacturing facilities
strategically located in the United States and Canada, in addition to facilities
in Australia and Mexico. Management believes OSG is the largest independent
contract manufacturer and packager of color cosmetics, high-end salon aerosol
hair care products and shaving creams and gels in North America. The Company had
revenues of $79.8 million, $110.3 million and $115.0 million for the years ended
December 31, 1996 and 1997 and for the six month period ended June 27, 1998,
respectively. The Company had net losses of $6.2 million, $1.5 million and $2.2
million for the years ended December 31, 1996 and 1997 and for the six month
period ended June 27, 1998, respectively.
The Company's customers include over 350 companies that market branded
and/or private label consumer products in the health and beauty aid, household
and automotive markets. Customers include Mary Kay, Sebastian and WD-40, as well
as other nationally branded marketers and numerous regional or niche marketers.
The Company's top ten customers have been with the Company for 17 years on
average, and nine of those top ten have been customers for at least ten years.
The Company believes that its ability to develop long-term relationships is due
to its product formulation expertise, manufacturing reliability, consistent
product quality and timely delivery. Many of OSG's customers lack in-house
manufacturing capabilities and outsource their manufacturing and packaging
requirements in order to focus on marketing. Management estimates that a
majority of the Company's revenues are derived from customers that do not have
in-house manufacturing capabilities for the products OSG manufactures. Companies
with the
1
<PAGE>
necessary in-house manufacturing capabilities utilize the Company's services for
new product launches, lower volume brands and to supplement internal capacity.
Contract manufacturers and packagers manufacture products to customer
specifications and fill containers for a wide range of industries. Contract
manufacturers typically charge a per-unit fee which varies depending on: (i) the
type of product, (ii) the type of services provided (filling only versus product
development, formulation, materials procurement, etc.), (iii) the container size
and order quantity, and (iv) the complexity of the manufacturing and packaging
process. The contract manufacturing and packaging industry is highly fragmented,
with hundreds of independent companies typically providing a narrow scope of
services in limited geographic areas. Competition is based principally on
formulation capabilities, product quality, reputation, service, dependability,
and cost-effectiveness. When the cost of distribution is a significant factor in
the total product cost or if customers desire geographic proximity to suppliers,
competition tends to be regionally based. Management believes that few
competitors offer the scale, expertise, reputation and range of services that
the Company provides.
The Company specializes in the manufacturing and packaging of color
cosmetic, aerosol, cream, lotion and liquid products:
COLOR COSMETIC PRODUCTS. Color cosmetic products include lipstick, face
powder, eye shadow, mascara and nail enamel. The Company manufactures and
packages color cosmetics for the entire range of cosmetic market sectors from
budget to high-end. Management estimates that retail revenues in the color
cosmetics industry were approximately $3.3 billion in 1996 (representing an
approximate 3.6% annual growth rate since 1993). In order to respond to and
drive fashion trends, marketers continually change their product offerings. By
offering product conceptualization and formulation expertise and manufacturing
flexibility, the Company helps its customers remain current with market trends.
Management believes that the Company is the largest independent contract
manufacturer of color cosmetics in North America. For the three month period
ended March 28, 1998, OSG's revenues from color cosmetic products were $15.1
million, representing approximately 28.1% of revenues.
AEROSOL PRODUCTS. Aerosol products include a broad range of products such
as hair spray, shaving cream and gel, lubricant, non-stick cooking spray and
household cleaning products. The aerosol system is one of the most effective
forms of delivering products in a cost-effective manner, while providing dosage
control, sanitary use and convenience. Management estimates that in 1996, over
approximately 3.2 billion aerosol units were filled in the United States
(representing an approximate 1.8% annual growth rate since 1990). The aerosol
products market has undergone significant change as certain states have enacted
regulations requiring reduced Volatile Organic Chemicals ("VOC") emissions,
resulting in the reformulation of aerosol products to meet these new standards.
The Company has reformulated over 100 products in response to legislative
changes. Not only must packagers of aerosol products obtain government permits,
but the packaging process also requires specialized equipment and expertise.
Management believes that the Company is the second largest independent aerosol
contract manufacturer and packager in North America, the largest in shaving
creams and gels and the largest in high-end salon aerosol hair care products.
For the three month period ended March 28, 1998, OSG's revenues from aerosol
products were $22.9 million, representing approximately 42.5% of revenues.
CREAM, LOTION AND LIQUID PRODUCTS. Creams and lotions consist of skin care
products such as facial preparations, hand and body care products, sun care and
anti-aging products. According to management, the skin care market is one of the
largest and fastest growing sectors of the health and beauty aid market,
estimated at approximately $6 billion in revenues in 1996 (representing an
approximate 7.5% annual growth rate since 1993). The Company began emphasizing
skin care products in 1994 after recognizing the growth potential of this
market, and such products have grown to approximately 20% of the Company's
revenues. Other liquid products manufactured and packaged by OSG include
shampoo, conditioner, fragrance, pump hair spray and gel and non-aerosol
deodorant, as well as products for the household and automotive markets such as
lighter fluid, lubricant and cleaning products. For the six month period ended
2
<PAGE>
March 28, 1998, OSG's revenues from cream, lotion and liquid products were $15.9
million, representing approximately 29.5% of revenues.
COMPETITIVE STRENGTHS
OSG attributes its leading market position to the following factors: (for a
more detailed description see "Business--Competitive Strengths")
FORMULATION EXPERTISE. OSG's research and development chemists have
developed hundreds of proprietary products on behalf of its customers that have
been placed into distribution. In addition, OSG is at the forefront of the
reformulation of aerosol products in response to changing government
regulations. Management believes that the Company's formulation expertise is
highly valued by its customers, resulting in greater customer loyalty and the
opportunity for revenue growth. Management estimates that a majority of the
Company's revenues are derived from products that OSG has formulated.
LONG-STANDING CUSTOMER RELATIONSHIPS. OSG provides contract manufacturing
and packaging services to over 350 customers worldwide. OSG's top ten customers
have been customers for over 17 years on average, and include, among others,
Mary Kay, Sebastian, and WD-40. All but one of the top-ten customers have used
the Company's services for more than ten years.
LEADER IN NICHE MARKETS. The Company focuses on market sectors requiring
specialized manufacturing and/or formulation capabilities such as color
cosmetics, high-end salon aerosol hair care products and shaving creams and
gels. As a result of its value-added manufacturing and formulation services,
management believes that it is able to retain customers and obtain higher profit
margins than contract packagers who focus primarily on commodity-type products.
FULL SERVICE CAPABILITIES. The Company offers a full array of services,
including materials procurement, blending, filling, packaging, warehousing and
distribution. OSG's size, capabilities and reputation make it one of the few
contract manufacturers and packagers in the health and beauty aid markets
capable of supporting large scale production runs and product launches for
customers such as Mary Kay.
MANUFACTURING EXPERTISE. The Company has the equipment and manufacturing
expertise required to manufacture and package a wide variety of color cosmetic,
aerosol, cream, lotion and liquid products while adhering to strict product
specifications for its customers. For example, the Company is able to fill
complex containers such as barrier packs (pressurized, non-aerosol containers),
which have made it a leader in manufacturing and packaging products such as
shaving gels. All four of the Company's facilities that manufacture and package
products for Procter & Gamble have been awarded Procter & Gamble's prestigious
Pinnacle Award for Good Manufacturing Practices.
STRATEGIC LOCATIONS. OSG's facilities are strategically located to service
regional, national and international customers. Management believes the Company
is the largest independent aerosol packager on the West Coast and in the
Southeast. OSG can manufacture and package various products at each of its
facilities, creating flexibility in servicing its geographically diverse
customers in a cost-effective manner. The Company's facilities in Mexico and
Australia serve the requirements of both international and local customers.
EXPERIENCED MANAGEMENT TEAM. OSG's management team, headed by the former
President of Kolmar, Christopher Denney, has extensive industry experience.
Members of senior management have spent a majority of their careers in the
packaging industry, averaging 24 years of experience. In addition, Walter K.
Lim, the founder of ASC, serves as Chairman of OSG, and Samuel D. Garretson, the
founder of Piedmont, serves as a director of OSG.
3
<PAGE>
BUSINESS STRATEGY
The Company intends to increase its sales and profitability by capitalizing
on its product conceptualization and formulation expertise and its
cost-effective, quality manufacturing capabilities. In addition, management
believes that it can continue to improve the Company's operating results by
implementing the following strategies: (for a more detailed description, see
"Business--Business Strategy")
CAPITALIZE ON CROSS-SELLING OPPORTUNITIES. The Company expects to increase
product penetration of its customer base by capturing business that previously
exceeded each of its subsidiaries' particular areas of expertise. For example,
the Company has developed proprietary color cosmetics formulations for
Sebastian, a customer that traditionally focused on hair care products, and
expects to offer color cosmetic products to other hair care product customers.
In addition, the Company can offer its aerosol capabilities to its color
cosmetics customers.
CENTRALIZE SALES AND MARKETING. The Company plans to centralize the
management of its sales efforts in order to improve communication with
customers, to cross-sell services to customers and to ensure uniform pricing and
sales strategies. The Company plans to establish a group specifically focused on
identifying market trends and assisting customers with new product ideas, as
well as promoting the Company through customer presentations, advertising and
trade shows. The centralized sales effort will enable the Company to serve
national accounts more effectively and to pursue customers located outside the
local marketing reach of the individual plants.
INCREASE INTERNATIONAL PRESENCE. OSG intends to capitalize on increased
international demand for cosmetic products by increasing its export sales and
selectively entering into joint ventures and licensing agreements. The Company
currently has licensing agreements in Japan, Korea, Thailand and Poland. In
addition, the Company plans to continue to develop its own "control"
brands--brands for which OSG owns the formulas and manufactures and packages the
products to its own specifications, leaving the marketing, promotion and
distribution to its customer.
REDUCE MANUFACTURING COSTS. The Company believes that the combination of
ASC, Kolmar and Piedmont will result in cost reductions from (i) allocating
production among facilities to better optimize the use of labor and equipment;
(ii) eliminating redundant administrative operations; and (iii) in certain
cases, purchasing larger amounts of raw materials on more favorable terms.
PURSUE STRATEGIC ACQUISITIONS. The Kolmar Acquisition represents a
continuation of OSG's strategy to provide more services to existing and
potential customers in the highly fragmented contract manufacturing and
packaging industry. OSG plans to acquire companies that will provide additional
cross-selling and cost-reduction opportunities.
SUMMARY OF THE KOLMAR ACQUISITION
THE INVESTORS
The key investors in the Company include Gordon+Morris Investment
Partnership, L.P. ("GMIP"), HarbourVest Partners IV-Direct Fund L.P. ("HVP-IV")
and HarbourVest Partners V-Direct Fund L.P. ("HVP-V").
The Gordon+Morris Group ("G+MG") is a merchant banking firm that sponsors
leveraged acquisitions and leveraged buildups in partnership with experienced
management teams. Founded in 1992, G+MG manages GMIP, which has $61.2 million in
committed capital. Prior to forming G+MG, two of the three principals were
general partners of Kelso & Company. Since 1980, the principals have completed
24 transactions with an average transaction value of approximately $75 million.
The principal offices of G+MG are located at 840 Newport Center Drive, Suite
600, Newport Beach, CA 92660.
4
<PAGE>
HarbourVest Partners, LLC ("HarbourVest") was formed by the management team
of Hancock Venture Partners, Inc. ("HVP") in January 1997 to become the
successor company to HVP. HVP was founded in 1982 as a subsidiary of John
Hancock Mutual Life Insurance Company for the purpose of managing diversified
private equity investment portfolios. Today, HarbourVest manages in excess of $3
billion of private equity capital on a worldwide basis and has offices in
Boston, London, and Hong Kong. HarbourVest invests in all types of private
equity funds as well as directly into operating companies. HVP-IV is a private
equity fund with $156.2 million in committed capital, and HVP-V is a private
equity fund with $300.0 million in committed capital. Both HVP-IV and HVP-V are
directly managed by HarbourVest. HarbourVest's principal offices are located at
One Financial Center, 44th floor, Boston, MA 02111.
COMPANY HISTORY
The Company currently owns and operates three wholly-owned subsidiaries:
ASC, Piedmont and Kolmar. Located in the City of Industry, California, ASC was
founded in 1966 by Walter K. Lim, OSG's Chairman. The Company acquired ASC on
February 14, 1994 for $35.0 million. Located in Gainesville, Georgia, Piedmont
was founded in 1985 by Samuel D. Garretson, a director of the Company. An
affiliate of the Company acquired Piedmont on September 30, 1996 for $14.1
million. Such affiliate was merged into the Company on June 30, 1997. Kolmar was
founded in 1921 and was acquired in 1991 by CCL Industries Inc. ("CCL"), a
publicly held Canadian contract packaging and manufacturing company. Kolmar's
main manufacturing facility is located in Port Jervis, New York, and other
smaller facilities are located in California, Pennsylvania, Canada, Mexico and
Australia.
THE KOLMAR ACQUISITION
On January 9, 1998, OSG acquired from CCL and its wholly-owned indirect
subsidiary, CCL Industries Corporation ("CCL Industries"), all of the
outstanding shares of Kolmar Laboratories, Inc. and the net assets of Kolmar
Canada Inc. (the "Kolmar Acquisition"). The terms of the Kolmar Acquisition
Agreement (as defined) provide that the Kolmar Acquisition was effective as of
January 1, 1998 and the financial data presented herein gives effect to the
acquisition as of such date. Unless the context otherwise requires, references
to CCL include references to CCL Industries. The purchase price for the Kolmar
Acquisition was $78.0 million, subject to certain post-closing adjustments. In
conjunction with the Kolmar Acquisition, the Company refinanced all of its
existing indebtedness totaling $34.6 million. The purchase price and the
refinanced indebtedness, plus $7.4 million of fees and expenses, was financed
through $30.0 million of borrowings under the Senior Secured Credit Facility,
$70.0 million of borrowings under the senior subordinated credit agreement,
dated as of January 9, 1998, among the Company, Bankers Trust Company ("BTCo"),
as agent, and certain other parties (the "Subordinated Bridge Facility") and the
issuance of $20.9 million of the Company's common stock ("Common Stock") to
existing shareholders of the Company.
5
<PAGE>
STRUCTURE OF THE COMPANY
The chart below illustrates the organizational structure of the Company:
Chart setting forth (i) the subsidiaries of the Company: Aerosol Services
Company, Inc., Kolmar Laboratories, Inc. and Piedmont Laboratories, Inc; and
(ii) the subsidiaries of Kolmar Laboratories, Inc.,: Kolmar (Aust.)Pty. Limited,
Kolmar de Mexico, S.A. de C.V. and Kolmar Canada Inc.
OSG is incorporated in Delaware, and its principal executive offices are
located at 425 South Ninth Avenue, City of Industry, CA 91746. Its telephone
number is (626) 968-8531.
6
<PAGE>
THE EXCHANGE OFFER
On March 3, 1998, the Company issued $105.0 million aggregate principal
amount of Old Notes. The Old Notes were sold pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws, in order to enable the Company to raise
funds on a more expeditious basis than necessarily would have been possible had
the initial sale been pursuant to an offering registered under the Securities
Act. BT, as a condition to its purchase of the Old Notes, requested that the
Company agree to commence the Exchange Offer following the Offering.
<TABLE>
<S> <C>
Notes Offered................. Up to $105,000,000 principal amount of 10 7/8% Series B
Senior Subordinated Notes due 2006, which have been
registered under the Securities Act.
The Exchange Offer............ The New Notes are being offered in exchange for a like
principal amount of Old Notes. Old Notes may be tendered
only in integral multiples of $1,000. The issuance of the
New Notes is intended to satisfy obligations of the Company
and the Guarantors contained in the Registration Rights
Agreement, dated as of March 3, 1998, among the Company, the
Guarantors listed therein and BT (the "Registration Rights
Agreement"). For procedures for tendering, see "The Exchange
Offer."
Tenders, Expiration Date;
Withdrawal.................. The Exchange Offer will expire at 5:00 p.m. New York City
time, on [ ], 1998, or such later date and time to
which it is extended. Each Holder tendering Old Notes must
acknowledge that he is not engaging in, nor intends to
engage in, a distribution of the New Notes. The tender of
Old Notes pursuant to the Exchange Offer may be withdrawn at
any time prior to the Expiration Date. Any Old Note not
accepted for exchange for any reason will be returned
without expense to the tendering Holder thereof as promptly
as practicable after the expiration or termination of the
Exchange Offer.
Procedures for Tendering Old
Notes....................... A Holder who wishes to tender Old Notes for exchange
pursuant to the Exchange Offer must transmit a properly
completed and duly executed Letter of Transmittal, including
all other documents required by such Letter of Transmittal
or (in the case of a book-entry transfer) an Agent's Message
in lieu of such Letter of Transmittal to the Exchange Agent
at the address set forth below under "Exchange
Offer--Exchange Agent" on or prior to the Expiration Date.
In addition, either (i) certificates for such Old Notes must
be received by the Exchange Agent along with the Letter of
Transmittal, or (ii) timely receipt of a Book-Entry
Confirmation (as defined) relating to a tender of such Old
Notes, if such procedure is available, into the Book-Entry
Transfer Facility (as defined) pursuant to the procedure for
book-entry transfer described below under "The Exchange
Offer", must be received by the Exchange Agent prior to the
Expiration Date with the Letter of Transmittal or an Agent's
Message in lieu of such Letter of Transmittal, or (iii) the
Holder must comply with the guaranteed delivery procedures
described below under "The Exchange Offer". See "The
Exchange Offer."
Conditions to Exchange
Offer....................... The Exchange Offer shall not be subject to any condition
other than that the Exchange Offer does not violate any
applicable law or regulation or interpretation of the staff
of the Commission.
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Federal Income Tax
Considerations.............. The exchange pursuant to the Exchange Offer will not result
in any income, gain or loss to the Holders or the Company
for Federal income tax purposes. See "Certain Federal Tax
Consequences."
Use of Proceeds............... There will be no proceeds to the Company from the exchange
pursuant to the Exchange Offer. See "Use of Proceeds" and
"Capitalization."
Exchange Agent................ U.S. Bank Trust National Association (formerly First Trust
National Association) (the "Exchange Agent") is serving as
exchange agent in connection with the Exchange Offer.
Shelf Registration
Statement................... Under certain circumstances, certain holders of Notes
(including holders of Old Notes who are not permitted to
participate in the Exchange Offer or holders who may not
freely resell New Notes received in the Exchange Offer) may
require the Company to file and cause to become effective, a
Shelf Registration Statement (as defined), which would cover
resales of Notes by such holders. See "Description of
Notes--Exchange Offer; Registration Rights."
</TABLE>
CONSEQUENCES OF EXCHANGING OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. Subject to certain limited exceptions, holders
of Old Notes who do not exchange their Old Notes for New Notes in the Exchange
Offer will no longer have registration rights with respect to their Old Notes.
The Company does not currently anticipate that it will register the Old Notes
under the Securities Act. See "Description of Notes--Exchange Offer;
Registration Rights." Based on interpretations by the staff of the Commission,
as set forth in no-action letters issued to third parties, the Company believes
that New Notes issued pursuant to the Exchange Offer in exchange for Old Notes
may be offered for resale, resold or otherwise transferred by Holders thereof
(other than any Holder which is an "affiliate" of the Company within the meaning
of Rule 405 under the Securities Act) without compliance with the registration
and prospectus delivery requirements of the Securities Act, provided that such
New Notes are acquired in the ordinary course of such Holder's business and such
Holder, other than a broker-dealer, has no arrangement with any person to
participate in the distribution of such New Notes. The Company has not sought
and does not intend to seek its own no-action letter in connection with the
Exchange Offer and there can be no assurance that the Commission would make a
similar determination with respect to the Exchange Offer. Each Holder, other
than a broker-dealer, must acknowledge that it is not engaged in, and does not
intend to engage in, a distribution of such New Notes and has no arrangement or
understanding to participate in a distribution of New Notes. Each broker-dealer
that receives New Notes for its own account in exchange for Old Notes must
acknowledge that such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities and that it will deliver
this Prospectus in connection with any resale of such New Notes. See "Plan of
Distribution." In addition, to comply with the securities laws of certain
jurisdictions, it may be necessary to qualify for sale or register thereunder
the New Notes prior to offering or selling such New Notes. The Company has
agreed, pursuant to the Registration Rights Agreement, subject to certain
limitations specified therein, to register or qualify the New Notes for offer or
sale under all applicable state securities or Blue Sky laws before the time the
Registration Statement (of which this Prospectus forms a part) is declared
effective by the Commission. See "The Exchange Offer--Consequences of Exchanging
Old Notes" and "Description of Notes-- Exchange Offer; Registration Rights."
8
<PAGE>
SUMMARY DESCRIPTION OF THE NEW NOTES
The terms of the New Notes and the Old Notes are identical in all material
respects, except (i) that the New Notes have been registered under the
Securities Act, (ii) for certain transfer restrictions and registration rights
relating to the Old Notes and (iii) that the New Notes will not contain certain
provisions relating to Liquidated Damages to be paid to Holders of Old Notes
under certain circumstances relating to the timing of the Exchange Offer and to
other registration requirements. See "Description of Notes-- Exchange Offer;
Registration Rights." The New Notes will bear interest from the most recent date
to which interest has been paid on the Old Notes or, if no interest has been
paid on the Old Notes, from March 3, 1998. Accordingly, registered Holders of
New Notes on the relevant record date for the first interest payment date
following the consummation of the Exchange Offer will receive interest accruing
from the most recent date to which interest has been paid or, if no interest has
been paid, from March 3, 1998. Old Notes accepted for exchange will cease to
accrue interest from and after the date of consummation of the Exchange Offer.
Holders whose Old Notes are accepted for exchange will not receive any payment
in respect of interest on such Old Notes otherwise payable on any interest
payment date the record date for which occurs on or after consummation of the
Exchange Offer.
<TABLE>
<S> <C>
Notes Offered................. Up to $105,000,000 aggregate principal amount of 10 7/8%
Series B Senior Subordinated Notes due 2006.
Issuer........................ Outsourcing Services Group, Inc.
Maturity Date................. March 1, 2006.
Interest Rate and Payment The New Notes will bear interest at the rate of 10 7/8% per
Dates......................... annum. Interest on the New Notes will be payable
semi-annually on each March 1 and September 1, commencing
[ ].
Optional Redemption........... The New Notes will be redeemable, in whole or in part, at
the option of the Company on or after March 1, 2003, at the
redemption prices set forth herein plus accrued and unpaid
interest to the date of redemption. In addition, at any time
on or prior to March 1, 2001, the Company may redeem, at its
option, up to 35.0% of the aggregate principal amount of the
New Notes with the net cash proceeds of one or more Equity
Offerings (as defined), at a redemption price equal to
110.875% of the aggregate principal amount of the New Notes
to be redeemed, plus accrued and unpaid interest to the
redemption date; PROVIDED that at least 65.0% of the
aggregate initial principal amount of the New Notes issued
hereunder together with the Old Notes originally issued and
not exchanged in the Exchange Offer remains outstanding
immediately after any such redemption. See "Description of
Notes--Redemption."
Change of Control............. Upon the occurrence of a Change of Control, each holder of
New Notes will have the right to require the Company to
repurchase such holder's New Notes at a purchase price equal
to 101.0% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of repurchase. See
"Description of Notes--Change of Control."
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Offers to Purchase............ In the event of certain asset sales, the Company will be
required to offer to repurchase the New Notes to the extent
of the net cash proceeds from such asset sales at a price
equal to 100.0% of the principal amount of the New Notes,
plus accrued and unpaid interest, if any, to the date of
repurchase. See "Description of Notes--Certain
Covenants--Limitation on Asset Sales."
Guarantees.................... The New Notes will be guaranteed on a full, unconditional,
joint and several and senior subordinated basis by the
Guarantors. The Guarantees will be unsecured senior
subordinated obligations of the Guarantors and will be
subordinated in right of payment to all existing and future
Guarantor Senior Debt (including indebtedness under the
Senior Secured Credit Facility). As of June 27, 1998, the
Guarantors had no Guarantor Senior Debt outstanding and
approximately $52.1 million of availability under the Senior
Secured Credit Facility. See "Description of
Notes--Guarantees."
Ranking....................... The New Notes will be unsecured senior subordinated
obligations of the Company and will be subordinated in right
of payment to all existing and future Senior Debt of the
Company. The New Notes will also be effectively subordinated
to all secured indebtedness of either the Company or any of
its subsidiaries to the extent of the assets securing such
indebtedness. The New Notes will rank PARI PASSU with any
future senior subordinated indebtedness of the Company and
will rank senior in right of payment to all other
subordinated obligations of the Company. As of June 27,
1998, the Company had no Senior Debt outstanding but has an
obligation to guarantee, on a senior basis, debt of the
Guarantors incurred under the Senior Secured Credit
Facility. In addition, as of June 27, 1998, the Company's
subsidiaries that are not Guarantors had approximately $5.9
million of indebtedness and accrued liabilities, including
trade payables, which would be structurally senior to the
New Notes. See "Description of Notes--Subordination."
Certain Covenants............. The Indenture governing the New Notes (the "Indenture") will
contain certain covenants that limit the ability of the
Company and its subsidiaries to, among other things, incur
additional indebtedness, pay dividends or make certain other
Restricted Payments (as defined), consummate certain asset
sales, enter into certain transactions with affiliates,
incur liens, create restrictions on the ability of a
subsidiary to pay dividends or make certain payments, sell
or issue preferred stock of subsidiaries to third parties,
merge or consolidate with any other person or sell, assign,
transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of the Company, and engage
in other lines of business. See "Description of
Notes--Certain Covenants."
</TABLE>
For additional information regarding the New Notes, see "Description of
Notes."
RISK FACTORS
Prospective holders of New Notes should consider carefully all of the
information set forth in this Prospectus and, in particular, should evaluate the
specific factors set forth under "Risk Factors" which begin on page 16 before
making a decision to tender their Old Notes in the Exchange Offer.
10
<PAGE>
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The summary financial data for the Company set forth below for the fiscal
years ended December 31, 1993, 1994, 1995, 1996 and 1997 are derived from the
audited financial statements of the Company and its predecessors. Such data for
the six months ended June 29, 1997 and June 27, 1998 are derived from the
unaudited interim financial statements of the Company, which include all
adjustments (consisting only of normal recurring adjustments) which the Company
considers necessary for a fair presentation of the results of operations for the
periods presented. The results for the six month period ended June 27, 1998 are
not necessarily indicative of the results to be expected for the year ending
December 31, 1998 or for any future period. OSG, previously Aerosol Services
Holding Corporation ("ASHC"), was formed to acquire ASC effective February 14,
1994. OSG had no operations prior to the acquisition. Consequently, the
financial data set forth below for the fiscal year ended December 31, 1994
includes the audited results of OSG for the period from inception, February 15,
1994 to December 31, 1994 and the unaudited balances of ASC for the period from
January 1, 1994 to February 14, 1994. Amounts in 1993 reflect the operating
results and financial position of ASC, prior to its acquisition by OSG.
The summary financial data for Piedmont set forth below for the fiscal years
ended September 30, 1993, 1994, 1995 and 1996 are derived from the audited
financial statements of Piedmont. Such data for Kolmar for the fiscal years
ended December 31, 1995, 1996 and 1997 are derived from audited combined
financial statements. Kolmar financial data for the years ended December 31,
1993 and 1994 are derived from Kolmar's unaudited financial statements. The
unaudited financial statements for the years ended December 31, 1993 and 1994
include all adjustments (consisting only of normal recurring adjustments) which
management of Kolmar considers necessary for a fair presentation of the
financial data for the periods presented.
The summary unaudited pro forma combined financial data of the Company for
the fiscal year ended December 31, 1997 are derived from the Unaudited Pro Forma
Condensed Combined Financial Data included elsewhere in this Prospectus. Such
data give effect to (i) the Kolmar Acquisition and the repayment of existing
debt of the Company in conjunction therewith; and (ii) the completion of the
Offering and application of the proceeds therefrom, as if each had occurred at
the beginning of the year ended December 31, 1997 and before changes in
accounting principles and extraordinary items.
The following information should be read in conjunction with the "Selected
Historical Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements of the
Company, Kolmar and Piedmont and the related notes thereto (collectively, the
"Financial Statements") included elsewhere in this Prospectus.
11
<PAGE>
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
OUTSOURCING SERVICES GROUP, INC. AND PREDECESSOR
<TABLE>
<CAPTION>
PREDECESSOR OSG
------------------------- --------------------------------------------------------
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31,
------------------------------------------------------------ ----------------------
JUNE 29, JUNE 27,
1993 1994 1995 1996(a) 1997 1997(a) 1998(a)
----------- ----------- ----------- -------- -------- ----------- --------
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE
DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues............................. $ 50,615 $ 52,730 $ 60,633 $ 79,832 $110,328 $ 51,776 $114,969
Gross profit............................. 8,720 7,955 8,258 11,084 15,117 7,350 17,736
Income from operations................... 5,770 3,981 3,650 5,089 4,333 2,126 7,293
Interest expense, net.................... 208 3,116 3,689 3,646 4,221 2,354 6,092
Net income (loss) (b).................... 12 540 52 (6,247) (1,516) (1,372) (2,249 )
Net income (loss) per share.............. 131.87 0.99 0.11 (9.06) (1.17) (1.03) (0.69 )
OTHER DATA:
Adjusted EBITDA (c)...................... $ 5,530 $ 7,584 $ 8,551 $ 4,606 $11,242
Net cash provided by (used in) operating
activities............................. 1,381 454 6,048 5,039 (5,514 )
Net cash (used in) investing
activities............................. (448) (15,048) (1,386) (542) (80,019 )
Net cash (used in) financing
activities............................. (905) 14,822 (4,584) (4,290) 89,326
Depreciation and amortization............ 1,880 2,495 4,218 2,480 3,949
Capital expenditures..................... 429 638 1,486 542 929
</TABLE>
PIEDMONT LABORATORIES, INC.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,(d)
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE --------------------------------------------------
DATA) 1993 1994 1995 1996
----------- ----------- ----------- --------
STATEMENTS OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues............................. $ 22,583 $ 34,121 $ 32,305 $ 35,541
Gross profit............................. 4,352 5,350 5,081 5,212
Income from operations................... 1,441 2,194 1,722 2,112
Interest expense, net.................... 290 227 200 223
Net income............................... 719 1,200 916 1,152
OTHER DATA:
Adjusted EBITDA (c)...................... $ 2,232 $ 2,969 $ 2,505 $ 2,877
Net cash provided by operating
activities............................. 1,042 1,885 1,445 1,450
Net cash (used in) investing
activities............................. (2,309) (751) (1,057) (1,188)
Net cash provided by (used in) financing
activities............................. 1,153 (931) (581) (248)
Depreciation and amortization............ 791 775 783 765
Capital expenditures..................... 515 739 932 992
</TABLE>
KOLMAR LABORATORIES, INC.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,(d)
------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ----------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues............................. $ 73,248 $ 63,782 $ 74,307 $103,316 $103,141
Gross profit............................. 10,133 9,821 14,001 20,061 16,968
Income (loss) from operations (e)........ (19,298) (23,209) 4,841 9,910 8,857
Interest expense, net.................... 1,357 1,801 3,133 3,697 4,164
Net income (loss) (e).................... (22,810) (16,593) 1,042 5,071 3,398
OTHER DATA:
Adjusted EBITDA (c)...................... $ 6,944 $ 12,178 $ 11,614
Net cash provided by (used in) operating
activities............................. (8,955) 4,515 (1,044)
Net cash (used in) investing
activities............................. (2,077) (9,576) (2,763)
Net cash provided by financing
activities............................. 11,604 7,397 7,996
Depreciation and amortization............ 2,103 2,268 2,757
Capital expenditures..................... 3,559 3,836 2,866
</TABLE>
12
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA (F)
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
DECEMBER
31, 1997
-----------
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE
DATA)
<S> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues............................. $ 213,469
Gross profit............................. 32,085
Income from operations................... 13,012
Interest expense, net (g)................ 12,554
Net loss (h)............................. (919)
Net loss per share....................... (0.27)
</TABLE>
NOTES TO SUMMARY HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(a) The Piedmont and Kolmar acquisitions were effective on September 30, 1996
and January 1, 1998, respectively. Consequently, the Company's Statements of
Operations Data and Other Data for the year ended December 31, 1997 and for
the six months ended June 27, 1998 (which includes the acquired operations
for the entire period) are not directly comparable to the Statements of
Operations Data and Other Data for the comparable periods in prior years.
Additionally, the results of operations for the fiscal year ended December
31, 1996 include the acquired operations for the three-month period
subsequent to the Piedmont acquisition.
(b) Net income of OSG for the fiscal year ended December 31, 1993 reflects $5.5
million of owners' bonus compensation prior to the acquisition of ASC by the
Company. Net loss of OSG for the fiscal year ended December 31, 1996
includes a $7.0 million charge associated with the cumulative effect of a
change in accounting principle. Net loss for the year ended December 31,
1997 and for the six months ended June 27, 1998 includes $1.1 million and
$2.1 million of extraordinary items, respectively, net of tax, associated
with charges for early retirement of debt.
(c) Adjusted EBITDA represents the sum of income from operations and
depreciation and amortization. For the fiscal year ended December 31, 1993,
the predecessor company to OSG paid its owners a bonus of $5.5 million. Such
payment has not been reflected in adjusted EBITDA. In addition, adjusted
EBITDA for the fiscal year ended December 31, 1993 excludes the loss from
operations from a discontinued operation totaling $100,000. The assets of
such operation were not purchased by OSG. Adjusted EBITDA for Kolmar
excludes a write-off of goodwill of $12,963,000 and a charge for
restructuring costs of $3,935,000 for the fiscal year ended December 31,
1993 and a $24,100,000 write-down of assets for the fiscal year ended
December 31, 1994.
Adjusted EBITDA is not intended to represent cash flows from operations as
defined by GAAP and should not be considered as an alternative to net income
as an indicator of the Company's operating performance or to cash flows as a
measure of liquidity. Adjusted EBITDA is included herein as it is a basis
upon which the Company assesses its financial performance and its ability to
service indebtedness. Adjusted EBITDA as calculated herein differs from the
definition of the term "Consolidated EBITDA" used in the Indenture under
which the New Notes are to be issued. See "Description of Notes--Certain
Definitions."
(d) Piedmont and Kolmar use 52-53 week fiscal years. For presentation purposes,
Piedmont's fiscal year has been reflected as if it ended on September 30.
Kolmar's fiscal year has been reflected as if it ended on December 31.
(e) Net loss for Kolmar for the fiscal year ended December 31, 1993 reflects
charges for restructuring costs of $3,935,000 and a write-off of $12,963,000
of goodwill. Net loss for Kolmar for the fiscal year ended December 31, 1994
reflects a $24,100,000 write-down of assets.
(f) See "Unaudited Pro Forma Condensed Combined Financial Data" for information
related to pro forma adjustments.
(g) Unaudited pro forma combined interest expense includes amortization of
deferred financing costs of $1.1 million for the fiscal year ended December
31, 1997.
(h) Unaudited pro forma combined net income is computed excluding the effects of
extraordinary items and the cumulative effects of a change in accounting
principle.
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RISK FACTORS
HOLDERS OF OLD NOTES SHOULD CAREFULLY CONSIDER THE FOLLOWING SPECIFIC RISK
FACTORS, AS WELL AS THE OTHER INFORMATION SET FORTH IN THE PROSPECTUS, BEFORE
TENDERING THEIR OLD NOTES IN THE EXCHANGE OFFER.
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT
As a result of the Offering, the Company is highly leveraged. The Company's
indebtedness was $106.8 million and stockholders' equity was $12.8 million, as
of June 27, 1998. In addition, subject to the restrictions in the Senior Secured
Credit Facility and the Indenture, the Company and its subsidiaries may incur
additional indebtedness (including additional Senior Debt and Guarantor Senior
Debt) from time to time to finance acquisitions, working capital, capital
expenditures or other purposes. For the year ended December 31, 1997 and the six
month period ended June 27, 1998, the Company's ratio of earnings to fixed
charges were 1.02 and 1.18, respectively.
The level of the Company's indebtedness could have important consequences to
holders of the Notes, including, but not limited to the following: (i) a
substantial portion of the Company's cash flow from operations must be dedicated
to debt service and will not be available for other purposes; (ii) the Company's
ability to obtain additional debt financing in the future for working capital,
capital expenditures, research and development or acquisitions may be limited;
(iii) to the extent that the Company's subsidiaries borrow under the Senior
Secured Credit Facility, they do so at floating rates of interest which could
result in higher interest expense in the event of an increase in interest rates;
and (iv) the Company's substantial leverage may make it more vulnerable to
adverse economic conditions and may limit its ability to withstand competitive
pressures or take advantage of business opportunities. Certain of the Company's
competitors are currently less leveraged and may have significantly greater
operating and financing flexibility than the Company.
The Company's ability to pay principal and interest on the Notes and to
satisfy its other debt obligations will depend upon the future operating
performance of its subsidiaries, which will be affected by prevailing economic
conditions and financial, business and other factors, certain of which are
beyond their control, as well as the availability of borrowings under the Senior
Secured Credit Facility or a successor facility. The Company currently
anticipates that its operating cash flow, together with borrowings by its
subsidiaries under the Senior Secured Credit Facility, will be sufficient to
meet its operating expenses and to service its debt requirements as they become
due. If the Company is unable to service its indebtedness, it will be forced to
take actions such as reducing or delaying capital expenditures, selling assets,
restructuring or refinancing its indebtedness (which could include the Notes),
or seeking additional debt or equity capital. There is no assurance that any of
these remedies can be effected on satisfactory terms, if at all. Factors which
could affect the Company's or its subsidiaries' access to the capital markets,
or the cost of such capital, include changes in interest rates, general economic
conditions, the perception in the capital markets of the Company's business,
results of operations, leverage, financial condition and business prospects. In
addition, the Senior Secured Credit Facility and the covenants with respect to
the Notes significantly restrict the Company's and its subsidiaries' ability to
incur additional indebtedness, including refinancing indebtedness, and to sell
assets. See "Capitalization," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Description of the Senior Secured Credit
Facility" and "Description of Notes."
HOLDING COMPANY STRUCTURE; EFFECTS OF ASSET ENCUMBRANCE
The Company is a holding company whose only material assets are the stock of
its subsidiaries. The Company's cash flow and, consequently, its ability to
service debt, including the Notes, is dependent upon the earnings of its
subsidiaries and the payment of funds by those subsidiaries to the Company in
the form of loans, dividends or otherwise. There can be no assurance that any
such payments will be adequate to fund the interest and principal payments on
the Notes when due. The Old Notes are, and the New Notes
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will be, guaranteed on a full, unconditional, joint and several and unsecured
senior subordinated basis by the Guarantors and, as a result, should the Company
fail to satisfy any payment obligation under the Notes, the holders would have a
direct claim therefor against the Guarantors. However, the Guarantors are
obligors with respect to substantial indebtedness, including in their capacity
as borrowers under the Senior Secured Credit Facility on a senior basis, and the
capital stock of the Guarantors is pledged to secure amounts borrowed
thereunder. Accordingly, there may be insufficient assets remaining after
payment of senior and/or secured claims to pay amounts due on the Notes. The
Company's non-Guarantor subsidiaries are separate and distinct legal entities
and have no obligation, contingent or otherwise, to pay any amounts due pursuant
to the Notes or to make funds available therefor, whether in the form of loans,
dividends or otherwise. The Indenture will permit the Company and its
subsidiaries (including non-Guarantor subsidiaries) to incur additional
indebtedness, subject to certain restrictions. See "Description of
Notes--Certain Covenants--Limitation on Incurrence of Additional Indebtedness."
Any right of the Company to participate in any distribution of the assets of any
of the non-Guarantor subsidiaries upon the liquidation, reorganization or
insolvency of such subsidiary (and the consequent availability of such assets to
service indebtedness of the Company, including under the Notes) will be subject
to the claims of creditors (including trade creditors) and preferred
stockholders, if any, of such non-Guarantor subsidiary, except to the extent
that the Company has a claim against such non-Guarantor subsidiary as a creditor
of such non-Guarantor subsidiary. Moreover, the payment of dividends and the
making of loan advances to the Company by its subsidiaries are subject to
restrictive covenants in agreements entered into by certain of such subsidiaries
including under the Senior Secured Credit Facility, and may be restricted upon
an event of default thereunder. The Guarantee of the Notes by any Guarantor will
be discharged upon the sale of such Guarantor in accordance with the provisions
of the Indenture. See "Description of Notes-- Guarantees."
SUBORDINATION OF THE NOTES AND THE GUARANTEES
The Notes and the Guarantees will be subordinated in right of payment to all
existing and future Senior Debt of the Company and to all existing and future
Guarantor Senior Debt of the Guarantors, (including borrowings under the Senior
Secured Credit Facility), respectively. In the event of the bankruptcy,
liquidation or reorganization of the Company, the assets of the Company or the
Guarantors will be available to pay obligations on the Notes only after all
Senior Debt of the Company and all Guarantor Senior Debt of the Guarantors, as
the case may be, has been paid in full. Any assets of the Company or the
Guarantors which may remain may not be sufficient to pay the amounts due on the
Notes then outstanding. The Notes will also be effectively subordinated to all
secured indebtedness of either the Company or any of its subsidiaries to the
extent of the assets securing any such indebtedness. As of June 27, 1998,
neither the Guarantors nor the Company had Guarantor Senior Debt or Senior Debt,
respectively, outstanding and the Guarantors had approximately $52.1 million of
availability under the Senior Secured Credit Facility. The Company has an
obligation to guarantee, on a senior basis, all amounts borrowed by its
subsidiaries under the Senior Secured Credit Facility. As of June 27, 1998,
subsidiaries of the Company that are not Guarantors, had approximately $5.9
million of indebtedness and accrued liabilities, including trade payables, which
would have been structurally senior to the Notes. Additional Senior Debt may be
incurred by the Company and additional Guarantor Senior Debt may be incurred by
the Guarantors from time to time, subject to certain restrictions.
The Company may not pay principal of, premium, if any, or interest on or
other amounts owing in respect of the Notes, make any deposit pursuant to any
defeasance provisions or repurchase, redeem or otherwise retire any of the Notes
if certain Senior Debt or Guarantor Senior Debt is not paid when due or any
other default on such Senior Debt or Guarantor Senior Debt occurs and the
maturity of such debt is accelerated in accordance with its terms unless, in
either case, the default has been cured or waived, any such acceleration has
been rescinded or such debt has been paid in full. Moreover, under certain
circumstances, if any non-payment default exists with respect to Designated
Senior Debt (as defined) which would permit the holders of such Designated
Senior Debt to accelerate the maturity thereof, the
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Company may not make any payments on the Notes for a specified time, unless such
default is cured or waived, or such Designated Senior Debt is paid in full. See
"Description of Notes--Subordination" and "Description of the Senior Secured
Credit Facility." The holders of the Notes will have no direct claim against the
Guarantors other than the claim created by the Guarantees. The rights of holders
of the Notes to participate in any distribution of assets of any Guarantor upon
liquidation, bankruptcy or reorganization may, as is the case with other
unsecured creditors of the Company, be subject to prior claims against such
Guarantor. The Guarantees may themselves be subject to legal challenge in the
event of the bankruptcy or insolvency of a Guarantor, or in certain other
circumstances. If such a challenge were upheld, the Guarantees would be
invalidated and unenforceable. See "--Fraudulent Transfer Considerations."
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS AND WARRANT
AGREEMENT
The Indenture will restrict, among other things, the Company's and its
subsidiaries' ability to: incur additional indebtedness; incur liens; pay
dividends or make certain other restricted payments; consummate certain asset
sales; enter into certain transactions with affiliates; incur indebtedness that
is subordinate in right of payment to any Senior Debt and senior in right of
payment to the Notes; create or cause to exist restrictions on the ability of a
subsidiary to pay dividends or make certain payments to the company; merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the assets of the Company. See
"Description of Notes--Certain Covenants." In addition, the Senior Secured
Credit Facility contains other and more restrictive covenants and will prohibit
the Company in all circumstances from prepaying certain of its indebtedness
(including the Notes). The Senior Secured Credit Facility also requires the
Company to maintain specified financial ratios and to satisfy certain financial
condition tests. The Company's ability to meet those financial ratios and tests
can be affected by events beyond its control, and there can be no assurance that
the Company will meet those tests. A breach of any of these covenants could
result in a default under the Senior Secured Credit Facility and/or the
Indenture. Upon the occurrence of an event of default under the Senior Secured
Credit Facility, the lenders could elect to declare all amounts outstanding
under the Senior Secured Credit Facility, together with accrued interest, to be
immediately due and payable. If the Company's subsidiaries were unable to repay
those amounts, the lenders could proceed against the collateral granted to them
to secure that indebtedness or against the Company under its guarantee of the
Senior Secured Credit Facility. If the debt outstanding under the Senior Secured
Credit Facility were to be accelerated, there can be no assurance that the
assets of the Company and its subsidiaries would be sufficient to repay the
obligations under the Senior Secured Credit Facility, other Senior Debt,
Guarantor Senior Debt or the Notes. Substantially all the assets of the Company
and its subsidiaries are pledged as security under the Senior Secured Credit
Facility. See "Description of the Senior Secured Credit Facility."
The Warrant Agreement (as defined) provides for certain anti-dilution rights
and restrictions on transferability and redemption of shares of Common Stock
from affiliates of the Company, in addition to certain registration, tag along,
drag along and preemptive rights. Further, without the prior consent of Chase
Manhattan (as defined), the Warrant Agreement prohibits (i) the Company and its
subsidiaries from repurchasing or redeeming shares of Common Stock, except for
shares repurchased or redeemed from management, other than on a PRO RATA basis
from all of the Company's shareholders and Chase Manhattan; (ii) the Company and
its subsidiaries from selling, leasing or otherwise transferring any property or
assets to, or purchasing, leasing or otherwise acquiring any property or assets
from, or otherwise engaging in any other transactions with, any of the Company's
affiliates, except (a) in the ordinary course, (b) transactions between or among
the Company and its wholly-owned subsidiaries, (c) any transactions existing as
of January 8, 1998 or (d) other transactions permitted by the Warrant Agreement;
(iii) the Company from entering into any agreement or instrument limiting in any
manner its ability to perform its obligations under the Warrant Agreement or the
Warrants, other than the Subordinated Bridge Facility and the Senior Secured
Credit Facility and any refinancing thereof (including the Notes); and (iv) the
Company from amending any provisions of the Company's employee stock option
plan, Stockholder Agreement (as defined) and organizational documents in any
manner that would have an adverse effect on Chase
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Manhattan's rights under the Warrant (as defined), without the prior consent of
Chase Manhattan. See "Description of Certain Terms of the Preferred Stock and
the Warrant Agreement--Warrant Agreement."
INDUSTRY CONDITIONS AND COMPETITION
The contract manufacturing and packaging industry is highly competitive. The
color cosmetic, aerosol, cream, lotion and liquid products sectors of this
industry are highly fragmented, with hundreds of independent contract
manufacturers typically providing a narrow scope of services in limited
geographic areas. Competitors include a large number of other contract
packagers, a few of which are larger than the Company and have substantially
greater resources. In addition, the Company's competitive position could be
adversely affected by any significant consolidation of companies operating in
the health and beauty aid, household and automotive products markets, and from
marketers with in-house manufacturing capabilities. In certain instances, the
Company's customers that have in-house manufacturing capabilities have increased
their own in-house manufacturing operations. Any significant increase in
in-house manufacturing by the Company's customers could adversely affect the
Company's business, results of operations or financial condition. See
"Business--Competition."
LACK OF COMBINED OPERATING HISTORY AND INTEGRATION OF ACQUISITIONS
ASC, Piedmont and Kolmar do not have any consolidated financial operating
history. The Company's future operating results depend in large part on its
ability to integrate the business of Kolmar with its existing business. Even
though the Company intends to operate ASC, Piedmont and Kolmar as an integrated
entity, no assurance can be given that the integration of Kolmar or future
acquisitions will be successful or that the anticipated strategic benefits of
Kolmar or of future acquisitions will be realized. If the Company is unable
successfully to integrate Kolmar or future acquisitions, the Company's business,
results of operations or financial condition, may be adversely affected. The
assimilation of acquisitions, including the Kolmar Acquisition, requires certain
non-recurring expenditures. There can be no assurance that the operations
acquired will be sufficiently profitable to offset such expenditures, or that
the operations of the acquired companies (or the historical business of the
Company) will not be adversely affected as a result of any such acquisition.
The Company has undertaken a strategy to consolidate a portion of the highly
fragmented contract packaging industry through acquisitions. Therefore, the
Company is continually involved in the investigation and evaluation of potential
acquisitions and at any time may be discussing possible transactions, conducting
due diligence investigations or otherwise pursuing acquisition opportunities. To
this effect, the Company may from time to time enter into letters of intent
regarding potential acquisitions which may or may not come to fruition. The
Company has entered into one non-binding letter of intent regarding its possible
acquisition of a company. This proposed transaction is still in the negotiation
stages and there can be no assurance that it will be consummated, and if so,
upon what terms. The Company historically has financed its acquisitions through
a combination of borrowings under bank credit facilities, seller-provided
financing, internally-generated cash flow and the issuance of equity securities.
The Company's future growth and financial success may depend upon a number of
factors, including, among others, its ability to identify acceptable acquisition
candidates, to consummate the acquisitions on favorable terms, improve the
financial performance of acquired companies and to integrate them into the
Company's operations and to attract and retain customers.
The Company's ability to execute its growth strategy depends to a
significant degree upon its ability to obtain additional long-term debt and
equity capital. Other than borrowings by the Company's subsidiaries under the
Senior Secured Credit Facility, the Company has no commitments for additional
borrowings or sales of equity, and there can be no assurance that the Company
will be successful in consummating any such future financing transactions on
terms favorable to the Company, if at all.
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ENVIRONMENTAL COMPLIANCE AND GOVERNMENT REGULATION
ENVIRONMENTAL REGULATION AND COMPLIANCE. The Company's operations and
properties are subject to extensive federal, state, local and foreign
environmental laws and regulations concerning, among other things, emissions to
air, discharges to water, the remediation of contaminated soil and groundwater,
and the generation, handling, storage, transportation, treatment and disposal of
waste and other materials (collectively, "Environmental Laws"). Based upon the
Company's experience to date, as well as certain indemnification agreements
obtained in connection with the Company's acquisitions, the Company believes
that the future cost of compliance with existing Environmental Laws and its
liability for identified environmental claims will not have a material adverse
effect on the Company's business, results of operations or financial condition.
There can be no assurance, however, that the Company's obligations in this
regard will not have such an effect or that the existing indemnities will be
sufficient to fund such liabilities. Furthermore, future events, such as new
information or changes in Environmental Laws (or in their interpretation or
enforcement by courts or governmental agencies) may give rise to additional
costs or claims that could have a material adverse effect on the Company's
business, results of operations or financial condition.
Certain environmental laws, such as the federal Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended ("CERCLA") and
analogous state laws impose strict, and in some circumstances, joint and
several, liability for the investigation and remediation of hazardous substances
released into the environment and related damages to natural resources. In that
regard, the Company or its affiliates have been identified as potentially
responsible parties ("PRPs") at several sites currently under investigation by
the United States Environmental Protection Agency ("EPA") and similar state
agencies. Based on indemnities obtained in connection with the Company's
acquisitions and environmental insurance obtained with respect to Kolmar, as
well as presently available information regarding each such site, the Company
does not believe that its related liability will have a material adverse effect
on the Company's business, results of operations or financial condition. There
can be no assurance, however, that these matters will not have such an effect,
or that the Company will not incur liability at additional similar sites in the
future. See "Business--Environmental Issues, Compliance and Government
Regulation."
The Company also faces risks relating to federal and state environmental
regulation of VOCs. Recently enacted or future legislation requiring reductions
in the use of these propellants could materially adversely affect the Company's
business if the industry does not develop propellant technology and product
formulations to meet such future standards. California and New York recently
have mandated reductions in VOCs in aerosol products, and it is possible that
Georgia and other states may in the future pass similar legislation or enact
regulations. All of the Company's products meet the current regulatory
standards, and management believes, although there can be no assurance, that
propellant technology and product formulations will be developed that meet the
future standards. See "Business--Environmental Issues, Compliance and Government
Regulation."
EMPLOYEE HEALTH AND SAFETY REGULATION. The Company's operations are subject
to a variety of worker safety laws. The United States Occupational Safety and
Health Act of 1970 ("OSHA") and analogous laws mandate general requirements for
safe workplaces for all employees. The Company believes that its operations are
in material compliance with applicable employee health and safety laws.
STATE AND FEDERAL REGULATION. The Company's manufacturing and packaging of
over-the-counter pharmaceuticals, which accounts for a small percentage of
revenues, and cosmetics is subject to regulation by the Food and Drug
Administration ("FDA") and by various state agencies, especially the California
Department of Health Services. Any failure by the Company to remain in
compliance with the regulations promulgated by these agencies could have a
material adverse effect on the Company's business.
The Company must also adhere to state and federal regulations governing
"good manufacturing practices," including testing, quality control,
manufacturing, inspection, and documentation requirements
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for certain products. Although the Company has had no difficulty in complying
with these regulations to date, if violations of such regulations are noted
during inspections of the Company's manufacturing facilities, the Company may be
required or may elect to cease manufacturing and packaging at the facility in
violation, pending resolution of the violation. In these circumstances, the
Company may also be required or may elect to recall products that were
manufactured under improper conditions. Although the Company has had no
difficulty in complying with these regulations to date, there can be no
assurance that any future federal or state regulation of the Company's business
will not have a material adverse impact on the Company's business, financial
condition or results of operations.
MINIMUM WAGES. The Company utilizes local labor contractors at its various
facilities to provide a significant portion of its production labor force. The
Company is subject to the Fair Labor Standards Act as well as various federal,
state and local regulations that govern such matters as minimum wage
requirements, overtime and working conditions. A large number of the Company's
employees, including those provided by local labor contractors, are paid at or
just above the federal minimum wage level and, accordingly, changes in these
laws, regulations or ordinances could have a material adverse effect on the
Company by increasing the Company's costs.
DEPENDENCE ON KEY PERSONNEL
The Company's success will continue to depend to a significant extent on its
executive officers and other key personnel, including certain development
chemists. The loss of the services of these key personnel could have a material
adverse effect on the Company, and there can be no assurance that the Company
would be able to find replacements with appropriate business experience and
skills. In addition, the success of any acquisition by the Company (including
the Kolmar Acquisition) may depend, in part, on the Company's ability to retain
management personnel of the acquired companies. The Company has entered into
employment agreements with certain of its executive officers and/or other key
employees. See "Management--Employment Agreements." The Company currently
maintains a "key man" insurance policy in respect of its Chief Executive
Officer. The loss of the services of key senior management, or the Company's
inability to attract and retain additional management personnel, could have a
material adverse effect on the Company's business, results of operations or
financial condition. See "Management" and "Certain Relationships and Related
Transactions."
RELIANCE ON MAJOR CUSTOMERS
A small number of customers account for a significant portion of the
Company's sales. For the six month period ended June 27, 1998, Sebastian
International Inc., WD-40 Co. and Mary Kay Corp. accounted for 13.2%, 8.4% and
8.0%, respectively, of the Company's revenues during this period. The Company
currently sells most of its products to customers pursuant to individually
negotiated purchase orders. The Company generally does not enter into long-term
contracts with its customers, and, therefore, such customers are not obligated
to purchase products from the Company for any specific period, in any specific
quantity or at any specified price, except as may be provided in a particular
purchase order. For the three month period ended March 28, 1998, approximately
52.9% of the Company's net revenues were derived from sales to its top ten
customers. Although the Company believes that its overall relations with
customers are good, there can be no assurance that such customers will continue
to purchase the Company's services, continue with a particular product line
which requires services which the Company offers or contract for the Company's
services in connection with any new or successor product lines. The loss of any
of the Company's major customers or a significant decrease in demand for certain
products sold by such major customers, could have a material adverse effect on
the Company's business, results of operations or financial condition. See
"Business--Customers and Products."
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PRODUCT LIABILITY
The sale of any product can expose the seller of such product to product
liability claims. The Company manufactures products principally for marketers
who sell such products to the public. However, there can be no assurance that
the Company will not be named in a product liability lawsuit involving a product
it produces. Although no material product liability claims have been asserted
against the Company to date, there can be no assurance that such claims will not
arise in the future. The Company now maintains product liability insurance which
provides coverage in the amount of $51 million per occurrence (above a $25,000
per occurrence self-insured retention) and $52 million in the aggregate for all
claims arising in a policy year (above a $250,000 annual aggregate self-insured
retention). A product liability claim that results in a judgment or settlement
in excess of the Company's insurance coverage could have a material adverse
effect on the Company's business, results of operations or financial condition.
See "Business-- Legal Proceedings."
CONTROL BY PRINCIPAL STOCKHOLDERS; CHANGE OF CONTROL
GMIP and HarbourVest (through HVP-IV and HVP-V) beneficially own an
aggregate of approximately 80% of the outstanding capital stock of the Company
on a fully-diluted basis. Accordingly, these stockholders have the ability,
acting together, to control fundamental corporate transactions requiring
stockholder approval, including without limitation, approval of merger
transactions involving the Company and sales of all or substantially all of the
Company's assets. There can be no assurance that the interests of GMIP and
HarbourVest (or their respective affiliates) either individually or
collectively, will not conflict with the interests of the holders of the Notes.
See "Management" and "Security Ownership of Certain Beneficial Owners and
Management." In addition, GMIP and HVP-IV (and its affiliates, which would
include HVP-V) are party to the Stockholder Agreement (as defined), pursuant to
which GMIP, HVP-IV and HVP-V, acting together, may force a sale of the Company
and take or block certain other actions. See "Certain Relationships and Related
Transactions--Stockholder Agreement and Registration Rights Agreement."
Upon a Change of Control, each holder of the Notes will have certain rights
to require the Company to repurchase all or a portion of such holder's Notes.
See "Description of Notes." If a Change of Control were to occur, there can be
no assurance that the Company would have sufficient funds to pay the repurchase
price for all Notes tendered by the holders thereof; such failure would result
in an event of default under the Indenture. In addition, a Change of Control
would constitute a default under the Senior Secured Credit Facility (which
agreement would also prohibit payment of the Notes upon a Change of Control) and
may be prohibited or limited by, or create an event of default under, the terms
of other agreements relating to borrowings which either the Company may enter
into from time to time, including other agreements relating to secured
indebtedness or Senior Debt, or the Company's subsidiaries may enter into from
time to time, including other agreements relating to secured indebtedness or
Guarantor Senior Debt.
FRAUDULENT TRANSFER CONSIDERATIONS
The obligation of any Guarantor under its guarantee of the Notes may be
subject to review under state or federal fraudulent transfer laws in the event
of the Guarantor's bankruptcy or other financial difficulty. Under those laws,
in a lawsuit by an unpaid creditor or representative of creditors of a
Guarantor, such as a trustee in bankruptcy or the Guarantor as debtor in
possession, if a court were to find that when the Guarantor entered into its
Guarantee, it (a) received less than fair consideration or reasonably equivalent
value therefore, and (b) either (i) was insolvent, (ii) was rendered insolvent,
(iii) was engaged in a business or transaction for which its remaining
unencumbered assets constituted unreasonably small capital, or (iv) intended to
incur or believed that it would incur debts beyond its ability to pay as such
debts matured, the court could avoid such Guarantee and the Guarantee and the
Guarantor's obligations thereunder, and direct the return of any amounts paid
thereunder to the Guarantor or to a
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fund for the benefit of its creditors. Moreover, regardless of the factors
identified in the foregoing clauses (i) through (iv), the court could avoid a
Guarantee and direct such repayment if it found that the Guarantee was entered
into with actual intent to hinder, delay, or defraud the Guarantor's creditors.
To the extent that a Guarantor's obligation under its Guarantee exceeds the
actual benefit that it receives for the issuance of the Notes, such Guarantor
may be deemed not to have received fair consideration or reasonably equivalent
value for its Guarantee. The Indenture will contain a savings clause that will
generally limit the obligation of each Guarantor under its Guarantee to the
maximum amount (if any) of the obligation that the Guarantor could incur without
that obligation being subject to avoidance as a fraudulent transfer, taking into
account all of the Guarantor's other obligations. There can be no assurance that
the savings clause would permit a Guarantee to survive a fraudulent transfer
attack, even in a reduced amount. If effective, the savings clause may reduce,
perhaps substantially, the obligations of one or more Guarantors under their
respective Guarantees to an amount less than required to pay the Notes in full.
If any Guarantee is avoided or reduced as a result of a fraudulent transfer
attack, holders of the Notes would have to look to the assets of the Company and
any of the remaining Guarantors for payment. There can be no assurance that
there would remain sufficient assets to satisfy the claims of the holders of the
Notes.
The measure of insolvency for purposes of the foregoing will vary depending
on the law of the jurisdiction being applied. Generally, however, an entity
would be considered insolvent if the sum of its debts (including contingent or
unliquidated debts) is greater than all of its property at a fair valuation or
if the present fair salable value of its assets is less than the amount that
will be required to pay its probable liability on its existing debts as they
become absolute and matured.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
The Old Notes have not been registered under the Securities Act or any other
securities laws of any jurisdiction and, therefore, may not be offered, sold or
otherwise transferred except in compliance with the registration requirements of
the Securities Act and any other applicable securities laws or pursuant to
exemptions from, or in transactions not subject to, those requirements and, in
each case, in compliance with certain other conditions and restrictions. Holders
of Old Notes who do not exchange their Old Notes for New Notes pursuant to the
Exchange Offer will continue to be subject to such restrictions on transfer of
such Old Notes as set forth in the legend thereon. In addition, upon
consummation of the Exchange Offer, holders of Old Notes which remain
outstanding will not be entitled to any rights to have such Old Notes registered
under the Securities Act or to any similar rights under the Registration Rights
Agreement (subject to certain limited exceptions). The Company does not
currently anticipate that it will register or qualify any Old Notes which remain
outstanding after consummation of the Exchange Offer for offer or sale in any
jurisdiction (subject to limited exceptions, if applicable). As a result of
these factors, to the extent that Old Notes are not tendered and accepted in the
Exchange Offer, a holder's ability to sell such Old Notes could be adversely
affected.
The New Notes and any Old Notes which remain outstanding after consummation
of the Exchange Offer will vote together as a single class for purposes of
determining whether holders of the requisite percentage thereof have taken
certain actions or exercised certain rights under the Indenture.
Upon consummation of the Exchange Offer, holders of Old Notes will not be
entitled to any Liquidated Damages or any further registration rights under the
Registration Rights Agreement, except under limited circumstances. See
"Description of Notes--Exchange Offer; Registration Rights."
ABSENCE OF PUBLIC MARKET; OPTIONAL REDEMPTION
The Old Notes were issued to, and the Company believes such securities are
currently owned by, a relatively small number of beneficial owners. The Old
Notes have not been registered under the Securities Act and will be subject to
restrictions on transferability if they are not exchanged for the New Notes.
21
<PAGE>
Although the New Notes may be resold or otherwise transferred by the holders
(who are not affiliates of the Company) without compliance with the registration
requirements under the Securities Act, they will constitute a new issue of
securities with no established trading market. There can be an assurance that
such a market will develop. In addition, the New Notes will not be listed on any
national securities exchange. The New Notes may trade at a discount from the
initial offering price of the Old Notes, depending upon prevailing interest
rates, the market for similar securities, the Company's operating results and
other factors. The Company has been advised by BT that it currently intends to
make a market in the New Notes, as permitted by applicable laws and regulations;
however, BT is not obligated to do so, and any such market-making activities may
be discontinued at any time without notice. In addition, such market-making
activity may be limited during the pendency of any Shelf Registration Statement.
Therefore, there can be no assurance that an active market for any of the New
Notes will develop, either prior to or after the Company's performance of its
obligations under the Registration Rights Agreement. If an active public market
does not develop, the market price and liquidity of the New Notes may be
adversely affected.
If a public trading market develops for the New Notes, future trading prices
will depend on many factors, including, among other things, prevailing interest
rates, the financial condition of the Company and the Guarantors, and the market
for similar securities. Depending on these and other factors, the New Notes may
trade at a discount.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that the market for the New Notes will not
be subject to similar disruptions. Any such disruptions may have an adverse
effect on holders of the New Notes.
Notwithstanding the registration of the New Notes in the Exchange Offer,
holders who are "affiliates" (as defined under Rule 405 of the Securities Act)
of the Company may publicly offer for sale or resell the New Notes only in
compliance with the provisions of Rule 144 under the Securities Act.
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes, where such Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes. See "Plan of Distribution."
In certain circumstances the Company may have the option to redeem some or
all of the Notes, including from proceeds of one or more Equity Offerings. A
partial redemption of the Notes may have the effect of reducing the liquidity of
the unpurchased Notes which could in turn have a negative impact on the market
price thereof. In addition, the Company may elect to exercise such optional
redemption at a time when the market price of the Notes is in excess of the call
price. See "Description of Notes--Redemption."
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus, including without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import, constitute "forward-looking
statements." Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or industry results to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions, both domestic and foreign;
industry and market capacity; fashion industry changes; wage rates; existing
government regulations and changes in, or the failure to comply with, government
regulations; liability and other claims asserted against the Company;
competition; the loss of any significant customers; change in operating strategy
or development plans; the ability to attract and retain qualified personnel; the
significant indebtedness of the Company; the availability and terms of capital
to fund the expansion of the Company's business; and other factors referenced in
this Prospectus. Certain of these factors are discussed in more detail elsewhere
in this Prospectus, including, without
22
<PAGE>
limitation, under the captions "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." Given these uncertainties, prospective investors are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer.
23
<PAGE>
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
as of June 27, 1998. This table should be read in conjunction with the Selected
Historical and Unaudited Pro Forma Combined Financial Data, the Unaudited Pro
Forma Condensed Combined Financial Data and the Financial Statements included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF
JUNE 27, 1998
-------------
<S> <C>
(DOLLARS IN THOUSANDS)
Long-term debt (including current portion)(a):
Notes............................................................................................ $ 106,845
-------------
Redeemable Series A Preferred Stock, $.001 par value; 3,750 shares authorized, 3,750 shares issued
and outstanding................................................................................... 384
Redeemable Series B Preferred Stock, $.001 par value; 26,250 shares issued and outstanding......... 3,990
Stockholders' equity including paid-in capital:
Common Stock, $.001 par value; 6,000,000 shares authorized, 1,267,174 (historical) and 3,360,174
shares issued and outstanding, as adjusted..................................................... 3
Common Stock warrants............................................................................ 828
Additional paid-in capital....................................................................... 33,590
Accumulated deficit(b)........................................................................... (11,475)
Equity adjustment for foreign currency translation............................................... (464)
Predecessor carryover basis adjustment(c)........................................................ (9,715)
-------------
Total stockholders' equity................................................................... 12,767
-------------
Total capitalization....................................................................... $ 123,986
-------------
-------------
</TABLE>
- ------------------------
(a) As of June 27, 1998, the Company, on a consolidated basis, had approximately
$52.1 million of availability under the Senior Secured Credit Facility. The
Company has an obligation to guarantee, on a senior basis, all amounts
borrowed by its subsidiaries under the Senior Secured Credit Facility.
(b) Accumulated deficit includes the cumulative effect of a change in accounting
principle of $7.0 million recorded in the year ended December 31, 1996, and
a loss from early extinguishment of debt of $1.1 million and $2.1 million,
net of tax recorded in the fiscal year ended December 31, 1997 and the six
months ended June 27, 1998, respectively.
(c) See "Notes to Consolidated Financial Statements of Outsourcing Services
Group, Inc. and Subsidiaries."
24
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following unaudited pro forma combined financial data (the "Unaudited
Pro Forma Combined Financial Data") for the the fiscal year ended December 31,
1997 have been derived by the application of pro forma adjustments to the
financial statements of the Company included elsewhere in this Prospectus. The
pro forma statement of operations data give effect to: (i) the Kolmar
Acquisition and the repayment of existing debt of the Company in conjunction
therewith; and (ii) the completion of the Offering and application of the
proceeds therefrom, as if each had occurred at the beginning of the year ended
December 31, 1997 and before changes in accounting principles and extraordinary
items. The adjustments are described in the accompanying notes. The Unaudited
Pro Forma Condensed Combined Financial Data do not purport to represent what the
Company's results of operations actually would have been if those transactions
had been consummated on the dates indicated, or what such results will be for
any future date or for any future period. In addition, the Unaudited Pro Forma
Condensed Combined Financial Data have been prepared by Company management and
are presented for informational purposes only. The pro forma adjustments are
based on management's current assumptions regarding purchase accounting
adjustments for the Kolmar Acquisition based on presently available information
and may change should additional information become available. The Unaudited Pro
Forma Condensed Combined Financial Data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements included elsewhere in this Prospectus.
Pro forma statement of operations data for the six months ended June 27, 1998
are not included herein because the adjustments required to give effect to the
Offering and the application of the proceeds therefrom are not considered to be
material to the overall understanding of the financial data presented herein. If
pro forma statement of operations data for the six months ended June 27, 1998
had been presented, interest expense and net income (net of taxes) for the
Company would have increased by $25,000 and decreased by $15,000, respectively.
25
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA) OSG KOLMAR ADJUSTMENTS COMBINED
- --------------------------------------------------------------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................................................... $ 110,328 $ 103,141 $ -- $ 213,469
Cost of goods sold............................................. 95,211 86,173 -- 181,384
---------- ---------- ----------- -----------
Gross Profit................................................... 15,117 16,968 -- 32,085
Selling, general and administrative expenses................... 10,784 8,111 178(a) 19,073
---------- ---------- ----------- -----------
Income from operations......................................... 4,333 8,857 (178) 13,012
Interest expense, net.......................................... 4,221 4,164 3,034(b) 12,554
1,135(c)
---------- ---------- ----------- -----------
Other income, net
Income before income tax provision and extraordinary item...... 112 4,693 (4,347) 458
Provision for income taxes..................................... 568 1,295 (486)(d) 1,377
---------- ---------- ----------- -----------
Income (loss) before extraordinary item........................ $ (456) $ 3,398 $ (3,861) $ (919)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Loss before extraordinary item per share....................... $ 0.35 $ 0.27
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
(a) The adjustment is comprised of the following adjustments to selling, general
and administrative expenses:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
DECEMBER 31,
(DOLLARS IN THOUSANDS) 1997
-------------
<S> <C>
Amortization expense of goodwill related to Kolmar Acquisition determined using a
40-year useful life (*)............................................................... $ 1,195
Additional depreciation expense related to step-up in Kolmar fixed assets............... 23
Reduced salaries and severance costs associated with the termination of certain OSG
management concurrent with the Kolmar Acquisition. Such duties will be assumed by the
existing management of Kolmar. As the terminated management of OSG will continue to
assist the Company as directors, the amount of the adjustment has been reduced by the
related directors' fees............................................................... (1,040)
------
Total adjustment...................................................................... $ 178
------
------
</TABLE>
(*) The Company has utilized a forty year useful life based on a number of
factors including the length of time that Kolmar has been in existence
and the lack of risk of technological obsolescence associated with its
products. For ASC and Piedmont, the Company utilized a twenty year useful
life for amortization of goodwill.
The amount recorded as goodwill has been reviewed for impairment by
Company management in accordance with its policy on an annual basis. The
Company evaluates the recoverability of intangible assets based on the
estimated fair market value of the Company. Based on such evaluation as
of December 31, 1997, no impairment or write-down existed or is required.
26
<PAGE>
(b) The adjustment represents the net effect resulting from the reduction of
interest expense associated with existing debt and the interest expense
associated with the Notes computed as follows:
<TABLE>
<CAPTION>
INTEREST EXPENSE
FOR THE AVERAGE
AVERAGE DEBT YEAR ENDED EFFECTIVE
OUTSTANDING DECEMBER 31, 1997 INTEREST RATE
------------ ----------------- ---------------
<S> <C> <C> <C>
PRO FORMA:
Notes.............................................. $ 105,000 $ 11,419 10.875%
-------
OSG:
Senior term debt................................... 18,425 (1,747) 9.5%
Senior revolving loans............................. 11,945 (1,314) 11.0%
Senior subordinated debt........................... 6,943 (822) 11.9%
Deferred financing cost............................ (339)
Total OSG interest expense....................... (4,221)
-------
KOLMAR:
Short term debt due to affiliate................... 31,311 (2,461) 7.9%
Long term debt due to affiliate.................... 21,666 (1,703) 7.9%
Total Kolmar interest expense.................... (4,164)
-------
ADJUSTMENT REQUIRED.................................. $ 3,034
-------
-------
</TABLE>
(c) The adjustment represents amortization of deferred financing costs related
to obtaining the Senior Secured Credit Facility and the Notes using a
weighted average seven-year useful life.
(d) The adjustment represents the additional income tax effects associated with
the Kolmar Acquisition and the corresponding pro forma adjustments. The rate
used to determine the amount of the adjustment represents the statutory rate
adjusted for certain non-deductible items such as goodwill amortization.
27
<PAGE>
SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The selected financial data set forth below for the fiscal years ended
December 31, 1993, 1994, 1995, 1996 and 1997 are derived from the audited
financial statements of the Company and its predecessors. Such data for the six
months ended June 29, 1997 and June 27, 1998 are derived from the unaudited
interim financial statements of the Company, which include all adjustments
(consisting only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the results of operations for the periods
presented. The results for the three month period ended June 27, 1998 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1998 or for any future period. OSG, previously ASHC, was formed to
acquire ASC effective February 14, 1994. OSG had no operations prior to the
acquisition. Consequently, the financial data set forth below for the fiscal
year ended December 31, 1994 includes the audited results of OSG for the period
from inception, February 15, 1994 to December 31, 1994 and the unaudited
balances of ASC for the period from January 1, 1994 to February 14, 1994.
Amounts in 1993 reflect the operating results and financial position of ASC,
prior to its acquisition by OSG.
The selected financial data for Piedmont set forth below for the fiscal
years ended September 30, 1993, 1994, 1995 and 1996 are derived from the audited
financial statements of Piedmont. Such data for Kolmar for the fiscal years
ended December 31, 1995, 1996 and 1997 are derived from audited combined
financial statements. Kolmar financial data for the years ended December 31,
1993 and 1994 are derived from Kolmar's unaudited financial statements. The
unaudited financial statements for the years ended December 31, 1993 and 1994
include all adjustments (consisting only of normal recurring adjustments) which
management of Kolmar considers necessary for a fair presentation of the
financial data for the periods presented.
The selected unaudited pro forma combined financial data of the Company for
the fiscal year ended December 31, 1997 are derived from the Unaudited Pro Forma
Condensed Combined Financial Data included elsewhere in this Prospectus. Such
data give effect to (i) the Kolmar Acquisition and the repayment of existing
debt of the Company in conjunction therewith; and (ii) the completion of the
Offering and application of the proceeds therefrom, as if each had occurred at
the beginning of the year ended December 31, 1997 and before changes in
accounting principles and extraordinary items. The related pro forma balance
sheet data give effect to (i) and (ii) as if each had occurred on December 31,
1997.
The following information should be read in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements included elsewhere in this Prospectus.
28
<PAGE>
SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
OUTSOURCING SERVICES GROUP, INC. AND PREDECESSOR
<TABLE>
<CAPTION>
PREDECESSOR OSG
---------------------- ---------------------------------------------------------
FISCAL YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
--------------------------------------------------------- JUNE 29, JUNE 27,
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA) 1993 1994 1995 1996(a) 1997 1997(a) 1998(a)
--------- ----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues.................................. $ 50,615 $ 52,730 $ 60,633 $ 79,832 $ 110,328 $ 51,776 $ 114,969
Gross profit.................................. 8,720 7,955 8,258 11,084 15,117 7,350 17,736
Income from operations........................ 5,770 3,981 3,650 5,089 4,333 2,126 7,293
Interest expense, net......................... 208 3,116 3,689 3,646 4,221 2,354 6,092
Net income (loss) (b)......................... 12 540 52 (6,247) (1,516) (1,372) (2,249)
Net income (loss) per share................... 131.87 0.99 0.11 (9.06) (1.17) (1.03) (0.69)
OTHER DATA:
Adjusted EBITDA (c)........................... $ 5,530 $ 7,584 $ 8,551 $ 4,606 $ 11,242
Net cash provided by (used in) operating
activities.................................. 1,381 454 6,048 5,039 (5,514)
Net cash (used in) investing activities....... (448) (15,048) (1,386) (542) (80,019)
Net cash provided by (used in) financing
activities.................................. (905) 14,822 (4,584) (4,290) 89,326
Depreciation and amortization................. 1,880 2,495 4,218 2,480 3,949
Capital expenditures.......................... 429 638 1,486 542 929
Ratio of earnings to fixed charges............ 1.02 1.18 1.02 1.36 1.02 (j) 1.18
BALANCE SHEET DATA (AT PERIOD END):
Cash and short-term investments............... $ 604 $ 4 $ 32 $ 610 $ 588 $ 817 $ 4,381
Working capital............................... 2,693 4,927 5,436 13,426 12,595 12,891 29,395
Total assets.................................. 13,927 37,793 39,100 52,351 51,841 49,757 185,366
Total debt.................................... 5,746 30,354 29,013 38,704 36,191 35,512 106,845
Redeemable preferred stock.................... -- 3,204 3,633 4,118 4,259 4,379 4,374
Stockholders' equity (deficit)................ 3,353 (3,301) (3,608) (3,340) (5,326) (4,974) 12,767
</TABLE>
PIEDMONT LABORATORIES, INC.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,(d)
----------------------------------------------
(DOLLARS IN THOUSANDS) 1993 1994 1995 1996
--------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues.................................. $ 22,583 $ 34,121 $ 32,305 $ 35,541
Gross profit.................................. 4,352 5,350 5,081 5,212
Income from operations........................ 1,441 2,194 1,722 2,112
Interest expense, net......................... 290 227 200 223
Net income.................................... 719 1,200 916 1,152
OTHER DATA:
Adjusted EBITDA (c)........................... $ 2,232 $ 2,969 $ 2,505 $ 2,877
Net cash provided by operating activities..... 1,042 1,885 1,445 1,450
Net cash (used in) investing activities....... (2,309) (751) (1,057) (1,188)
Net cash provided by (used in) financing
activities.................................. 1,153 (931) (581) (248)
Depreciation and amortization................. 791 775 783 765
Capital expenditures.......................... 515 739 932 992
BALANCE SHEET DATA (AT PERIOD END):
Cash and short-term investments............... $ 3 $ 206 $ 13 $ 27
Working capital............................... 539 1,197 1,280 1,871
Total assets.................................. 10,086 12,225 11,714 13,919
Total debt.................................... 3,629 2,698 2,116 1,869
Stockholders' equity.......................... 4,163 5,363 6,278 7,431
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues..................................
Gross profit..................................
Income from operations........................
Interest expense, net.........................
Net income....................................
OTHER DATA:
Adjusted EBITDA (c)...........................
Net cash provided by operating activities.....
Net cash (used in) investing activities.......
Net cash provided by (used in) financing
activities..................................
Depreciation and amortization.................
Capital expenditures..........................
BALANCE SHEET DATA (AT PERIOD END):
Cash and short-term investments...............
Working capital...............................
Total assets..................................
Total debt....................................
Stockholders' equity..........................
</TABLE>
29
<PAGE>
KOLMAR LABORATORIES, INC.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,(d)
---------------------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues................................................. $ 73,248 $ 63,782 $ 74,307 $ 103,316 $ 103,141
Gross profit................................................. 10,133 9,821 14,001 20,061 16,968
Income (loss) from operations (e)............................ (19,298) (23,209) 4,841 9,910 8,857
Interest expense, net........................................ 1,357 1,801 3,133 3,697 4,164
Net income (loss) (e)........................................ (22,810) (16,593) 1,042 5,071 3,398
OTHER DATA:
Adjusted EBITDA (c).......................................... $ 6,944 $ 12,178 $ 11,614
Net cash provided by (used in) operating activities.......... (8,955) 4,515 (1,044)
Net cash (used in) investing activities...................... (2,077) (9,576) (2,763)
Net cash provided by financing activities.................... 11,604 7,397 7,996
Depreciation and amortization................................ 2,103 2,268 2,757
Capital expenditures......................................... 3,559 3,836 2,866
BALANCE SHEET DATA (AT PERIOD END):
Cash and short-term investments.............................. $ 3,137 $ 2,458 $ 3,030 $ 5,366 $ 9,555
Working capital.............................................. 6,949 (10,066) (7,170) (11,894) (8,310)
Total assets................................................. 48,537 38,057 53,663 67,972 72,855
Total debt................................................... 24,802 30,313 39,933 49,124 57,120
Stockholders' equity (deficit)............................... 217 (19,297) (24,454) (19,175) (17,410)
</TABLE>
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA (F)
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
DECEMBER 31,
1997
------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues............................. $ 213,469
Gross profit............................. 32,085
Income from operations................... 13,012
Interest expense, net (g)................ 12,554
Net (loss) (h)........................... (919)
Net (loss) per share..................... (0.27)
</TABLE>
30
<PAGE>
NOTES TO SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(a) The Piedmont and Kolmar acquisitions were effective on September 30, 1996
and January 1, 1998, respectively. Consequently, the Company's Statements of
Operations Data and Other Data for the year ended December 31, 1997 and for
the six months ended June 27, 1998 (which includes the acquired operations
for the entire period) are not directly comparable to the Statements of
Operations Data and Other Data for the comparable periods in prior years.
Additionally, the results of operations for the fiscal year ended December
31, 1996 include the acquired operations for the three-month period
subsequent to the Piedmont acquisition.
(b) Net income of OSG for the fiscal year ended December 31, 1993 reflects $5.5
million of owners' bonus compensation prior to the acquisition of ASC by the
Company. Net loss of OSG for the fiscal year ended December 31, 1996
includes a $7.0 million charge associated with the cumulative effect of a
change in accounting principle. Net loss for the year ended December 31,
1997 and for the six months ended June 27, 1998 includes $1.1 million and
$2.1 million of extraordinary items, respectively, net of tax, associated
with charges for early retirement of debt.
(c) Adjusted EBITDA represents the sum of income from operations and
depreciation and amortization. For the fiscal year ended December 31, 1993,
the predecessor company to OSG paid its owners a bonus of $5.5 million. Such
payment has not been reflected in adjusted EBITDA. In addition, adjusted
EBITDA for the fiscal year ended December 31, 1993 excludes the loss from
operations from a discontinued operation totaling $100,000. The assets of
such operation were not purchased by OSG. Adjusted EBITDA for Kolmar
excludes a write-off of goodwill of $12,963,000 and a charge for
restructuring costs of $3,935,000 for the fiscal year ended December 31,
1993 and a $24,100,000 write-down of assets for the fiscal year ended
December 31, 1994.
Adjusted EBITDA is not intended to represent cash flows from operations as
defined by GAAP and should not be considered as an alternative to net income
as an indicator of the Company's operating performance or to cash flows as a
measure of liquidity. Adjusted EBITDA is included herein as it is a basis
upon which the Company assesses its financial performance and its ability to
service indebtedness. Adjusted EBITDA as calculated herein differs from the
definition of the term "Consolidated EBITDA" used in the Indenture under
which the New Notes are to be issued. See "Description of Notes--Certain
Definitions."
(d) Piedmont and Kolmar use 52-53 week fiscal years. For presentation purposes,
Piedmont's fiscal year has been reflected as if it ended on September 30.
Kolmar's fiscal year has been reflected as if it ended on December 31.
(e) Net loss for Kolmar for the fiscal year ended December 31, 1993 reflects
charges for restructuring costs of $3,935,000 and a write-off of $12,963,000
of goodwill. Net loss for Kolmar for the fiscal year ended December 31, 1994
reflects a $24,100,000 write-down of assets.
(f) See "Unaudited Pro Forma Condensed Combined Financial Data" for information
related to pro forma adjustments.
(g) Unaudited pro forma combined interest expense includes amortization of
deferred financing costs of $1.1 million for the fiscal year ended December
31, 1997.
(h) Unaudited pro forma combined net income is computed excluding the effects of
extraordinary items and the cumulative effects of a change in accounting
principle.
(i) Unaudited pro forma combined adjusted EBITDA represents the sum of income
from operations and depreciation and amortization and excludes non-recurring
charges, consisting primarily of salary expenses of $1.1 million for the
termination of certain OSG management concurrent with the Kolmar Acquisition
and broken deal costs of $138,000 for the fiscal year ended December 31,
1997.
(j) The ratio of earnings to fixed charges for OSG was less than 1 to 1 and
earnings were insufficient to cover fixed charges by $228,000 during the six
month period ended June 29, 1997.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
OSG, through its operating subsidiaries, ASC, Piedmont and Kolmar, is a
full-service contract manufacturer and packager of consumer products for
marketers in the health and beauty aid, household and automotive consumer
product markets. The Company manufactures and packages a broad range of products
including color cosmetics (such as lipstick, face powders and eye shadow),
aerosols (such as hair spray, shaving cream and gel and lubricants) and creams,
lotions and liquids (such as skin care products, shampoo, pump hair spray and
lighter fluid). Management believes OSG is the largest independent contract
manufacturer and packager of color cosmetics, high-end salon aerosol hair care
products and shaving creams and gels in North America.
The Company typically charges a per-unit fee which varies depending on: (i)
the type of product, (ii) the type of services provided (filling only versus
product development, formulation, materials procurement, etc.), (iii) the
container size and order quantity, and (iv) the complexity of the manufacturing
and packaging process. In many cases, the Company purchases the raw and
packaging materials on behalf of its customers. In such instances, the Company
passes the costs of such materials on to its customers and charges a handling
fee in addition to the fill fee. Typically the Company's gross margin on
purchases of raw materials on behalf of its clients is lower than its gross
margin on filled goods. For the years December 31, 1995, December 31, 1996 and
December 31, 1997, and for the six months ended June 29, 1997 and June 27, 1998,
the Company purchased approximately $76.7 million, $105.2 million, $112.9
million, $55.3 million and $62.4 million of raw materials for its customers. The
percentage of materials purchased directly by customers versus purchased by the
Company on behalf of customers may have an impact on total revenues and cost of
goods sold.
The predecessor to OSG, ASHC, was organized on February 14, 1994 to acquire
ASC from its founders. On September 30, 1996, GMIP, HVP-IV and certain members
of management independently acquired Piedmont in a purchase of stock from its
founder. On June 30, 1997, Piedmont's holding company, ACHC, was merged with and
into ASHC (the "Merger"). The Merger was accounted for similar to a pooling of
interests. Such accounting treatment is in accordance with Interpretation No. 39
of APB Opinion 16, appropriate for entities under common control and results in
the combined assets and liabilities for both entities being recorded at their
historical cost. ASHC's name was changed to OSG. As a result, the Company's
historical statements of operations for the period from September 30, 1996 (the
time of the GMIP and HVP-IV investments) through June 30, 1997 were restated to
include the statements of operations of Piedmont. Because of the accounting
structure of the acquisition of Piedmont, the Company's financial results for
the year ended December 31, 1996 include only three months of Piedmont's
operations. Similarly, the financial results for the nine months ended September
30, 1996 include only the operating results of ASC. The financial results for
the fiscal year ended December 31, 1997 and the six months ended June 29, 1997
and June 27, 1998 include the results of both Piedmont and ASC.
The Company's results of operations for the periods presented herein are not
readily comparable due to the acquisition of Piedmont as of September 30, 1996
and due to the acquisition of Kolmar as of January 1, 1998. The results of
operations for the fiscal years 1995 through 1997 for OSG and Kolmar are
discussed separately below. The financial results for the six month period ended
June 27, 1998 includes the results of ASC, Piedmont and Kolmar.
32
<PAGE>
RESULTS OF OPERATIONS
OSG
The following table sets for the the Company's statements of operations for
the periods indicated and the percentage relationship of each item to net
revenues:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
---------------------------------------------------------------- --------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997 JUNE 29, 1997
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues........................ $ 60,633 100.0% $ 79,832 100.0% $ 110,328 100.0% $ 51,776 100.0%
Cost of goods sold.................. 52,375 86.4 68,748 86.1 95,211 86.3 44,426 85.8%
Selling, general and administrative
expenses.......................... 4,608 7.6 5,995 7.5 10,784 9.8 5,224 10.1%
Income from operations.............. 3,650 6.0 5,089 6.4 4,333 3.9 2,126 4.1%
Interest expense, net............... 3,689 6.1 3,646 4.6 4,221 3.8 2,324 4.5%
Extraordinary item.................. -- -- -- -- 1,060 1.0 -- --
Cummulative effect of a change in
accounting principal.............. -- -- 7,000 8.8 -- -- -- --
Net income (loss)................... 52 0.1 (6,247) (7.8) (1,516) (1.4) (1,372) -2.6%
OTHER DATA:
Adjusted EBITDA..................... 5,530 9.1 7,584 9.5 8,551 7.8 4,606 8.9%
Capital expenditures................ 429 -- 638 -- 1,486 -- 542 1.0%
<CAPTION>
(DOLLARS IN THOUSANDS) JUNE 27, 1998
--------------------
<S> <C> <C>
Net revenues........................ $ 114,969 100.0%
Cost of goods sold.................. 97,233 84.6%
Selling, general and administrative
expenses.......................... 10,443 9.1%
Income from operations.............. 7,293 6.3%
Interest expense, net............... 6,092 5.3%
Extraordinary item.................. 2,145 1.9%
Cummulative effect of a change in
accounting principal.............. -- --
Net income (loss)................... (2,249) -2.0%
OTHER DATA:
Adjusted EBITDA..................... 11,242 9.8%
Capital expenditures................ 929 0.8%
</TABLE>
SIX MONTHS ENDED JUNE 27, 1998 VERSUS SIX MONTHS ENDED JUNE 29, 1997
NET REVENUES. Net revenues increased $63.2 million, or 122.1% to $115
million for the six months ended June 27, 1998 from $51.8 million for the six
months ended June 29, 1997. The increase was primarily attributable to the
acquisition of Kolmar effective January 1, 1998, which accounted for $48.9
million or 77.4% of the increase in net revenues. Without the acquisition of
Kolmar, net revenues increased approximately $14.3 million or 27.6%, due
primarily to an increase in net revenues from aerosol products due to a
combination of a 23.3% increase in volume and a continuing shift at ASC towards
providing more raw materials for its customers.
COST OF GOODS SOLD. Cost of goods sold increased $52.8 million, or 118.9%
to $97.2 million for the six months ended June 27, 1998 from $44.4 million for
the six months ended June 29, 1997. The increase was primarily attributable to
the acquisition of Kolmar, which accounted for $37.8 million or 71.6% of the
increase in cost of goods sold. Without the acquisition of Kolmar, cost of goods
sold increased approximately $15 million or 33.8%, due primarily to an increase
in the volume of aerosol products sold, as well as increases in the minimum wage
in California and a continuing shift at ASC towards purchasing more raw
materials for its customers. As a percentage of net revenues, cost of goods sold
declined to 84.6% for the six months ended June 27, 1998 from 85.8% for the six
months ended June 29, 1997. This was primarily attributable to the fact that
Kolmar's cost of goods sold as a percentage of net revenue was lower than ASC's
and Piedmont's, since ASC and Piedmont purchase raw materials for a higher
percentage of their customers. This decline was partially offset by an increase
in ASC's cost of goods as a result of an increase in the minimum wage in
California (September 1997 and March 1998) as well as a continuing shift toward
purchasing more raw material for it's customers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") increased $5.2 million or 99.9% to $10.4
million for the six months ended June 27, 1998 from $5.2 million for the six
months ended June 29, 1997. The increase was primarily attributable to the
acquisition of Kolmar, which accounted for $5.0 million, or 95.4% of the
increase in SG&A. As a percentage of net revenues, SG&A decreased to 9.1% for
the six months ended June 27, 1998 from 10.1% for the six months ended June 29,
1997.
33
<PAGE>
INTEREST EXPENSE. Interest expense increased $3.7 million, or 158% to $6.1
million for the six months ended June 27, 1998 from $2.4 million for the six
months ended June 29, 1997. The increase was primarily attributable to the
increase of indebtedness to finance the acquisition of Kolmar.
EXTRAORDINARY ITEM. As a result of the January 1998 refinancing in
conjunction with the acquisition of Kolmar and the March 3, 1998 refinancing of
all indebtedness then outstanding under the Senior Secured Credit Facility and
the Subordinated Bridge Facility, with $105.0 million of Notes, the Company
wrote off deferred financing charges of $2.2 million, net of $1.4 million of
taxes, related to the prior indebtedness.
EBITDA. EBITDA increased $6.6 million, or 144.1% to $11.2 million for the
six months ended June 27, 1998 from $4.6 million for the six months ended June
29, 1997.
CAPITAL EXPENDITURES. On April 30, 1998, one of the company's subsidiaries
entered into an "Asset Purchase Agreement" with a competitor to acquire certain
packaging equipment for $0.6 million. In addition to this purchase, capital
expenditures for the six months ended June 27, 1998 were $0.9 million and
consisted primarily of maintenance oriented projects, new customer requirements
and various cost savings expenditures.
FISCAL YEAR ENDED DECEMBER 31, 1997 VERSUS FISCAL YEAR ENDED DECEMBER 31, 1996
NET REVENUES. Net revenues increased $30.5 million, or 38.2% to $110.3
million for the year ended December 31, 1997 from $79.8 million for the year
ended December 31, 1996. The increase was primarily attributable to the
acquisition of Piedmont on September 30, 1996, which accounted for $36.1 million
or 118.4% of the increase in net revenues. Without the acquisition of Piedmont,
net revenues decreased approximately $5.7 million, or 7.1% due to a decline in
net revenues from household products, which was partially offset by an increase
in personal care products.
COST OF GOODS SOLD. Cost of goods sold increased $26.5 million, or 38.6% to
$95.2 million for the year ended December 31, 1997 from $68.7 million for the
year ended December 31, 1996. The increase was primarily attributable to the
acquisition of Piedmont, which accounted for $30.9 million, or 116.6 % of the
increase in cost of goods sold. Without the acquisition of Piedmont, cost of
goods sold decreased approximately $4.2 million or 6.1% primarily as a result of
a decline in net revenues at ASC. As a percentage of net revenues, cost of goods
sold increased to 86.3% for the year ended December 31, 1997 from 86.1% for the
year ended December 31, 1996. This was primarily attributable to the fact that
ASC's cost of goods increased as a result of an increase in the cost of labor
due to the minimum wage increase in September 1996 (Federal) and March 1997
(California), and a continuing shift toward purchasing more raw material for its
customers, which was partially offset by the fact that Piedmont's cost of goods
sold as a percentage of net revenues was lower than ASC's given ASC purchased
raw materials for a higher percentage of customers.
SG&A. SG&A increased $4.8 million or 80% to $10.8 million for the year
ended December 31, 1997 from $6.0 million for the year ended December 31, 1997.
The increase was primarily attributable to the acquisition of Piedmont, which
accounted for $4.4 million, or 91.7% of the increase in SG&A. As a percentage of
net revenues, SG&A increased to 9.8% for the year ended December 31, 1997 from
7.5% for the year ended December 31, 1996. In addition to the acquisition of
Piedmont, the increase in SG&A was attributable to costs associated with staff
additions in senior management and research and development and an upgrade in
the Company's computer system, as well as expenses related to an unsuccessful
acquisition bid.
INTEREST EXPENSE. Interest expense increased $0.6 million, or 16.6% to $4.2
million for the year ended December 31, 1997 from $3.6 million for the year
ended December 31, 1996. The increase was partially attributable to the
acquisition of Piedmont, which accounted for $0.2 million, or 33.3 % of the
increase, as well as additional borrowing to meet increased working capital
requirements.
34
<PAGE>
EXTRAORDINARY ITEM. On June 30, 1997, the Company refinanced its credit
agreement concurrent with the formation of OSG and the merger. As a result of
this refinancing, the Company wrote off deferred financing charges of $1.1
million, net of $0.6 million of taxes, related to the prior indebtedness.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. During fiscal 1996,
the Company changed its accounting policy for evaluating the recoverability of
intangible assets. Previously, the Company determined the recoverability of
intangible assets by considering estimated future operating income of the
Company on an undiscounted cash flow basis. Under its new policy, the Company
evaluates the recoverability of intangible assets based on the estimated fair
market value of the Company. The cumulative effect of the change in accounting
policy has resulted in a write down of goodwill associated with the acquisition
of ASC of $7.0 million.
ADJUSTED EBITDA. EBITDA increased $1.0 million, or 13.2% to $8.6 million
for the year ended December 31, 1997 from $7.6 million for the year ended
December 31, 1996. The increase was primarily attributable to the acquisition of
Piedmont, which accounted for $2.8 million of the increase in EBITDA, which was
offset by a decline in volume attributable to household products, costs
attributable to staff additions in senior management and an upgrade in the
Company's computer systems as well as expenses related to an unsuccessful
acquisition bid.
CAPITAL EXPENDITURES. Capital expenditures for the year ended December 31,
1997 were $1.5 million and consisted primarily of maintenance oriented projects,
new customer requirements and various cost savings expenditures.
FISCAL YEAR ENDED DECEMBER 31, 1996 VERSUS FISCAL YEAR ENDED DECEMBER 31, 1995
NET REVENUES. Net revenues increased $19.2 million, or 31.7% to $79.8
million for the year ended December 31, 1996 from $60.6 million for the year
ended December 31, 1995. The acquisition of Piedmont accounted for $7.5 million,
or 39.1% of the increase in net revenues. Without the acquisition of Piedmont,
net revenues increased approximately $11.7 million, or 19.3%, due to a strong
market for personal care and household products. This included new product
launches of premium hair care products for several key customers in the high-end
salon market.
COST OF GOODS SOLD. Cost of goods sold increased $16.3 million, or 31.1% to
$68.7 million for the year ended December 31, 1996 from $52.4 million for the
year ended December 31, 1995. The acquisition of Piedmont accounted for $6.3
million, or 38.7% of the increase in cost of goods sold. As a percentage of net
revenues, cost of goods sold declined from 86.4% to 86.1%. This is primarily
attributable to the fact that Piedmont's cost of goods sold margin is lower than
ASC's, since ASC purchases raw materials for a higher percentage of its
customers. Excluding the effects of the acquisition of Piedmont, cost of goods
sold as a percentage of net revenues remained essentially unchanged at 86.3% for
the year ended December 31, 1996 compared to 86.4% for the year ended December
31, 1995.
SG&A. SG&A increased $1.4 million, or 30.4% to $6.0 million for the year
ended December 31, 1996 from $4.6 million for the year ended December 31, 1995.
The increase was primarily attributable to the acquisition of Piedmont, which
accounted for $1.1 million, or 78.6% of the increase in SG&A. As a percentage of
net revenues, SG&A decreased to 7.5% for the year ended December 31, 1996 from
7.6% for the year ended December 31, 1995. Excluding the acquisition of
Piedmont, SG&A as a percentage of net revenues declined to 6.1% for the year
ended December 31, 1996 from 7.6% for the year ended December 31, 1995. The
decline in SG&A as a percentage of net revenues was largely attributable to
economies of scale realized with the significant increase in net revenues.
INTEREST EXPENSE. Interest expense remained essentially unchanged at $3.6
million for the year ended December 31, 1996 despite a $0.2 million increase due
to the acquisition of Piedmont which was offset by a decline in interest expense
attributable to lower average borrowings.
35
<PAGE>
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE During fiscal 1996, the
Company changed its accounting policy for evaluating the recoverability of
intangible assets. Previously, the Company determined the recoverability of
intangible assets by considering estimated future operating income of the
Company on an undiscounted cash flow basis. Under its new policy, the Company
evaluates the recoverability of intangible assets based on the estimated fair
market value of the Company. The cumulative effect of the change in accounting
policy has resulted in a write-down of goodwill associated with the acquisition
of ASC of $7.0 million.
ADJUSTED EBITDA. EBITDA increased $2.1 million, or 38.2% to $7.6 million
for the year ended December 31, 1996 from $5.5 million for the year ended
December 31, 1995. The acquisition of Piedmont accounted for $0.6 million, or
28.6% of the increase in EBITDA.
CAPITAL EXPENDITURES. Capital expenditures for the year ended December 31,
1996 were $0.6 million and consisted primarily of maintenance oriented projects,
new customer requirements and various cost savings expenditures as well as an
upgrade of the Company's MIS system.
KOLMAR
The following table sets forth Kolmar's statements of operations for the
periods indicated and the percentage relationship of each item to net revenues:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
DECEMBER
DECEMBER 30, DECEMBER 31, 31,
(DOLLARS IN THOUSANDS) 1995 1996 1997
-------------------- -------------------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues....................................................... $ 74,307 100.0% $ 103,316 100.0% $ 103,141
Cost of goods sold................................................. 60,306 81.1 83,255 80.6 86,173
Selling, general and administrative expenses....................... 9,160 12.3 10,151 9.8 8,111
Income from operations............................................. 4,841 6.5 9,910 9.6 8,857
Interest expense, net.............................................. 3,133 4.2 3,697 3.6 4,164
Net income (loss).................................................. 1,042 1.4 5,071 4.9 3,398
Adjusted EBITDA.................................................... 6,944 9.4 12,178 11.8 11,614
Capital Expenditures............................................... 3,559 -- 3,836 -- 2,866
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
Net revenues....................................................... 100.0%
Cost of goods sold................................................. 83.5
Selling, general and administrative expenses....................... 7.9
Income from operations............................................. 8.6
Interest expense, net.............................................. 4.0
Net income (loss).................................................. 3.3
Adjusted EBITDA.................................................... 11.3
Capital Expenditures............................................... --
</TABLE>
FISCAL YEARS ENDED DECEMBER 31, 1997 VERSUS FISCAL YEARS ENDED DECEMBER 31, 1996
NET REVENUES. Net revenues decreased $0.2 million, or 0.2% to $103.1
million for the year ended December 31, 1997 from $103.3 million for the year
ended December 31, 1996. The decrease in net revenues was a result of certain
customers taking business in-house which was partially offset by new business
with existing and new customers as well as an increase in the percentage of
customers for whom the Company purchased raw materials and packaging components.
COST OF GOODS SOLD. Cost of goods sold increased $2.9 million, or 3.5% to
$86.2 million for the year ended December 31, 1997 from $83.3 million for the
year ended December 31, 1996. As a percentage of net revenues, cost of goods
sold increased to 83.5% from 80.6%. The increase was primarily due to a change
in the product mix sold and to an increase in the percentage of customers for
whom Kolmar purchased raw materials and packaging components.
SG&A. As a result of management's continued effort to reduce costs, SG&A
decreased $2.1 million or 20.6% to $8.1 million for the year ended December 31,
1997 from $10.2 million for the year ended December 31, 1996. As a percentage of
net revenues, SG&A decreased to 7.9% for the year ended December 31, 1997 from
9.8% for the year ended December 31, 1996. The improvement was due in large part
to a more cost effective worker's compensation program adopted in 1997, as well
as staff reductions and other cost reductions.
36
<PAGE>
INTEREST EXPENSE. Interest expense increased $0.5 million, or 13.5% to $4.2
million for the year ended December 31, 1997 from $3.7 million for the year
ended December 31, 1996. Such interest expense was related to obligations owed
to Kolmar's former owner, CCL.
ADJUSTED EBITDA. EBITDA decreased $0.6 million, or 4.9% to $11.6 million
for the year ended
December 31, 1997 from $12.2 million for the year ended December 31, 1996.
CAPITAL EXPENDITURES. Capital expenditures for the year ended December 31,
1997 were $2.9 million and consisted primarily of maintenance oriented projects,
new customer requirements, cost reduction expenditures, information systems and
environmental safety and regulation expenditures.
FISCAL YEAR ENDED DECEMBER 31, 1996 VERSUS FISCAL YEAR ENDED DECEMBER 30, 1995
NET REVENUES. Net revenues increased $29.0 million, or 39.0% to $103.3
million for the year ended December 31, 1996 from $74.3 million for the year
ended December 30, 1995. The acquisition of Imperial Cosmetics Services
("Imperial") on January 4, 1996 accounted for $6.9 million, or 23.8% of the
increase in net revenues. Excluding the acquisition of Imperial, net revenues
increased approximately $22.1 million, or 29.7%, due to a strong market for
color cosmetic, particularly lipsticks, and skin care products. In addition, net
revenues increased due to a higher percentage of customers for whom Kolmar
purchased all raw and packaging materials.
COST OF GOODS SOLD. Cost of goods sold increased $23.0 million, or 38.1% to
$83.3 million for the year ended December 31, 1996 from $60.3 million for the
year ended December 30, 1995. The acquisition of Imperial accounted for $5.3
million, or 23.0% of the increase in cost of goods sold. As a percentage of net
revenues, cost of goods sold declined from 81.2% to 80.6%. This was primarily
due to economies of scale from the increase in net revenues as well as an
improvement in product mix. Excluding the acquisition of Imperial, cost of goods
sold as a percentage of net revenues improved to 80.9% for the year ended
December 31, 1996 from 81.2% for the year ended December 30, 1995.
SG&A. SG&A increased $1.0 million, or 10.9% to $10.2 million for the year
ended December 31, 1996 from $9.2 million for the year ended December 30, 1995.
The increase was entirely attributable to the acquisition of Imperial, which
accounted for $1.0 million, or 100% of the increase in SG&A. As a percentage of
net revenues, SG&A decreased to 9.9% for the year ended December 31, 1996 from
12.4% for the year ended December 30, 1995. Excluding the acquisition of
Imperial, SG&A as a percentage of net revenues declined to 9.5% for the year
ended December 31, 1996 from 12.4% for the year ended December 30, 1995. The
decline in SG&A as a percentage of net revenues was largely attributable to
economies of scale realized with the increase in net revenues, as well as a
continuation of cost reduction efforts.
INTEREST EXPENSE. Interest expense was $3.7 million for the year ended
December 31, 1996, versus $3.1 million for the year ended December 31, 1995. The
increase was due to higher borrowings from CCL for working capital and capital
expenditures.
ADJUSTED EBITDA. EBITDA increased $5.3 million, or 76.8% to $12.2 million
for the year ended December 31, 1996 from $6.9 million for the year ended
December 31, 1995. The acquisition of Imperial accounted for approximately $1.1
million, or 20.8% of the increase in EBITDA.
CAPITAL EXPENDITURES. Capital expenditures for the year ended December 31,
1996 were $3.8 million and consisted primarily of new customer requirements,
maintenance oriented projects, cost reduction expenditures, information systems
and environmental, safety and regulation expenditures.
37
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of June 27, 1998, OSG had cash and short-term investments of $4.4 million
and long-term debt of $106.8 million. The primary sources of cash were from
financing and investing activities. Cash (used in) provided by operations was
$(5.5) million and $5.0 million for the six months ended June 27, 1998 and June
29, 1997, respectively. Principal uses of cash were for capital expenditures and
debt repayment. Net repayments under the Company's working capital facilities
were $8.9 million and $3.2 million for the six months ended June 27, 1998 and
June 29, 1997, respectively.
As of January 1, 1998, OSG consummated the Kolmar Acquisition. The purchase
price for the Kolmar Acquisition was $78.0 million, subject to certain
post-closing adjustments. In conjunction with the Kolmar Acquisition, the
Company refinanced all of its existing indebtedness totaling $36.2 million. The
purchase price and refinanced indebtedness, plus $7.4 million of fees and
expenses, was financed through $30.0 million of borrowings under the Senior
Secured Credit Facility, $70.0 million of borrowings under the Subordinated
Bridge Facility and the issuance of $20.9 million of Common Stock to existing
stockholders of the Company.
On March 3, 1998, OSG refinanced all of its existing indebtedness totaling
$99.8 million. The refinanced indebtedness, plus $3.3 million of fees and
expenses, was financed through the issuance of $105.0 million of the Notes.
As a result of the refinancing of existing indebtedness and the indebtedness
incurred to consummate the Kolmar Acquisition, the Company is highly leveraged.
As of June 27, 1998, the Company's indebtedness was $106.8 million of which
$105.0 million bears an interest rate of 10 7/8% per annum with the balance of
$1.8 million indebtedness bearing interest under the terms of the Senior Secured
Credit Facility with an affiliate of Bankers Trust ("BTCO"). As of June 27,
1998, stockholder's equity was $12.8 million and the Company's subsidiaries had
$52.1 million of availability under the Senior Secured Credit Facility. The
Senior Secured Credit Facility bears interest at a floating rate based on (1)
the Prime Lending Rate (defined as the rate which BTCO announces as its prime
lending rate from time to time), plus 0.75% or (2) the Eurodollar Rate (defined
as the rate of the offered quotation, if any, to first class banks in the
Eurodollar market by BTCO for U.S. dollar deposits) for one, two, three or six
months, in each case plus 2.25%. The obligations of the Company's subsidiaries
under the Senior Secured Credit Facility are secured by a security interest in
substantially all of their assets, and the Company's obligations under its
guarantee of the Senior Secured Credit Facility are secured by substantially all
of its assets. The terms of the Notes and the Senior Secured Credit Facility
have restrictive covenants that restrict the Company's ability to pay dividends,
sell certain assets, and incur additional borrowings. Furthermore, the Company
is required to maintain certain financial ratios and satisfy financial condition
tests. The Company's ability to pay principal and interest on its indebtedness,
will depend upon the future operating performance of its subsidiaries and will
require a substantial portion of the Company's cash flow from operations. For
the six months ended June 27, 1998, the Company's ratio of earnings to fixed
charges was 1.18.
In conjunction with the Kolmar Acquisition and the issuance of the Notes,
the Company wrote off $3.6 in deferred financing costs associated with prior
financings.
Pursuant to the Management Services Agreement (as defined), the Company paid
G+MG $800,000 upon closing of the Kolmar Acquisition and will pay G+MG, in
exchange for management services, (i) an annual fee of $350,000, which is
subject to adjustment, and (ii) up to 2% of the total consideration received or
paid in various transactions. The Company is also a party to the HarbourVest
Agreement (as defined), pursuant to which the Company will pay HarbourVest, in
exchange for financial and business advisory services, (i) an annual fee of
$115,000 and (ii) 1/3 of the fee, under certain conditions, received by G+MG
under its Management Services Agreement with the Company. See "Certain
Relationships and Related Transactions--Management Services Agreement."
38
<PAGE>
As part of the acquisition of Kolmar, the Company became responsible for an
existing Kolmar benefit plan. Although the Company reserves the right to amend
such benefit plan, the Company is evaluating such benefit plans status and
whether to extend it to additional participants.
The Company anticipates that its primary uses of working capital in future
periods will be to service it's indebtedness and provide funds for operations
and future acquisitions. Should the Company seek to acquire additional
businesses, it will have to incur additional indebtedness and possibly raise
additional equity. The Company's ability to grow through acquisitions is
dependent upon the availability of such financing as well as the availability of
acquisition candidates and the terms on which such candidates may be acquired,
which may be adversely affected by competition for such acquisitions.
The Company believes that cash on hand, cash flow from operations and
available borrowings under its Senior Secured Credit Facility, will be
sufficient to meet the Company's presently anticipated working capital and
capital expenditure needs through fiscal 1999.
The Company's capital expenditures are expected to decline slightly from
historical levels as a result of the significant historical spending on
information system upgrades and major cost-saving programs. The Company's
capital expenditures will be primarily for new customer requirements,
maintenance, cost-saving projects, environmental, safety and regulatory
expenditures. As of June 27, 1998 the Company had $0.5 million of commitments
for capital expenditures.
The Company has established a Year 2000 Project team that is currently
reviewing the internal and external readiness of its computer systems, business
practices, suppliers and customers for handling Year 2000 issues. These issues
involve systems that are date sensitive and may not be able to distinguish 20th
century dates from 21st century dates resulting in miscalculations and software
failures. The Company has developed plans to address internal system
modifications required to minimize the potential problems by December 31, 1999.
Currently in the initial phase, the Company is in the process of identifying all
hardware and software systems within the Company. Included in this group are
systems used in the information technology group as well as non-information
technology systems, such as production equipment that is date sensitive.
Additionally, the Company is in the process of contacting all of the its key
external business partners to determine their extent and plans for Year 2000
compliance.
Based on analysis completed to date, management believes its current staff
will be sufficient to address the Year 2000 issues and that the staff time
required to address such issues should not have an adverse effect on other
projects. Also, the Company recognizes the need for a contingency plan for
continued operations in the case of business interruption and intends to
formulate such a plan in the near future. Management currently estimates that
its costs related to the Year 2000 issue will be approximately $150,000.
Management believes such costs will not have a material effect on its results of
operations or financial condition. However, there can be no assurance that there
will not be a delay in, or increased costs associated with, the implementation
of the necessary systems and changes to address the Year 2000 issues, and the
Company's inability to implement such systems and changes could have an adverse
effect on future results of operations. In addition, the failure of certain of
the Company's significant customers or vendors to appropriately address the Year
2000 issue in a timely manner could have a material adverse effect on the
Company.
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<PAGE>
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and conditions set forth in this Prospectus and in the
accompanying Letter of Transmittal (which together constitute the Exchange
Offer), the Company will accept for exchange Old Notes which are properly
tendered on or prior to the Expiration Date and not withdrawn as permitted
below. As used herein, the term "Expiration Date" means 5:00 p.m., New York City
time, on [ ].
As of the date of this Prospectus, $105,000,000 aggregate principal amount
of the Old Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about the date hereof, to all Holders of
the Old Notes known to the Company. The Company's obligation to accept Old Notes
for exchange pursuant to the Exchange Offer is subject to certain conditions as
set forth under "--Certain Conditions to the Exchange Offer" below. Any Old
Notes not accepted for exchange for any reason will be returned without expense
to the tendering Holder thereof as promptly as practicable after the expiration
or termination of the Exchange Offer.
Old Notes tendered in the Exchange Offer must be in denominations of
principal amount of $1,000 and any integral multiple thereof.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted for
exchange, upon the satisfaction of any of the conditions of the Exchange Offer
specified below under "--Certain Conditions to the Exchange Offer." The Company
will give oral or written notice of any extension, amendment, non-acceptance or
termination to the Holders of the Notes as promptly as practicable, such notice
in the case of any extension to be issued by means of a press release or other
public announcement no later than 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a Holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering Holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal. Except as set forth below, a Holder who wishes to tender
Old Notes for exchange pursuant to the Exchange Offer must transmit a properly
completed and duly executed Letter of Transmittal, including all other documents
required by such Letter of Transmittal or (in the case of a book-entry transfer)
an Agent's Message in lieu of such Letter of Transmittal, to the Exchange Agent
at the address set forth below under "Exchange Agent" on or prior to the
Expiration Date. In addition, either (i) certificates for such Old Notes must be
received by the Exchange Agent along with the Letter of Transmittal, or (ii) a
timely confirmation of a book-entry transfer (a "Book-Entry Confirmation") of
such Old Notes, if such procedure is available, into the Exchange Agent's
account at DTC (the "Book-Entry Transfer Facility") pursuant to the procedure
for book-entry transfer described below, must be received by the Exchange Agent
prior to the Expiration Date with the Letter of Transmittal or an Agent's
Message in lieu of such Letter of Transmittal, or (iii) the Holder must comply
with the guaranteed delivery procedures described below. The term "Agent's
Message" means a message, transmitted by the Book-Entry Transfer Facility to and
received by the Exchange Agent and forming a part of a Book-Entry Confirmation,
which states that the Book-Entry Transfer Facility has received an express
acknowledgment from the tendering participant, which acknowledgment states that
such participant has received and agrees to be bound by the Letter of
Transmittal and that the Company may enforce such Letter of Transmittal against
such participant. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS.
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IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY
INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD
NOTES SHOULD BE SENT TO THE COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a Holder of the Old Notes who has not
completed the box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the Letter of Transmittal or (ii) for the account of an
Eligible Institution (as defined below). In the event that signatures on a
Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantees must be by a firm which is a member
of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust company
having an office or correspondent in the United States or an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Exchange Act which is
a member of one of the recognized signature guarantee programs identified in the
Letter of Transmittal (an, "Eligible Institution"). If Old Notes are registered
in the name of a person other than a signer of the Letter of Transmittal, the
Old Notes surrendered for exchange must be endorsed by, or be accompanied by a
written instrument or instruments of transfer or exchange, in satisfactory form
as determined by the Company in its sole discretion, duly executed by the
registered owner with the signature thereon guaranteed by an Eligible
Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or to not accept any
particular Old Notes which acceptance might, in the judgment of the Company or
their counsel, be unlawful. The Company also reserves the absolute right to
waive any defects or irregularities or conditions of the Exchange Offer as to
any particular Old Notes either before or after the Expiration Date (including
the right to waive the ineligibility of any Holder who seeks to tender Old Notes
in the Exchange Offer). The interpretation of the terms and conditions of the
Exchange Offer as to any particular Old Note either before or after the
Expiration Date (including the Letter of Transmittal and the instructions
thereto) by the Company shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old Notes
for exchange must be cured within such reasonable period of time as the Company
shall determine. Neither the Company, the Exchange Agent nor any other person
shall be under any duty to give notification of any defect or irregularity with
respect to any tender of Old Notes for exchange, nor shall any of them incur any
liability for failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other than the
registered Holder or Holders of Old Notes, such Old Notes must be endorsed or
accompanied by powers of attorney, in either case signed exactly as the name or
names of the registered Holder or Holders that appear on the Old Notes.
If the Letter of Transmittal or any Old Notes or powers of attorneys are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted with the Letter of Transmittal.
By tendering, each Holder will represent to the Company that, among other
things, the New Notes acquired pursuant to the Exchange Offer are being obtained
in the ordinary course of business of the person receiving such New Notes,
whether or not such person is the Holder and that neither the Holder nor such
other person has any arrangement or understanding with any person to participate
in the distribution of the New Notes. If any Holder or any such other person is
an "affiliate", as defined under
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Rule 405 of the Securities Act, of the Company and is engaged in or intends to
engage in or has an arrangement or understanding with any person to participate
in a distribution of such New Notes to be acquired pursuant to the Exchange
Offer, then such Holder or any such other person (i) could not rely on the
applicable interpretations of the staff of the Commission and (ii) must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. Each broker-dealer that receives New
Notes for its own account in exchange for Old Notes, where such Old Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver this Prospectus in
connection with any resale of such New Notes. See "Plan of Distribution." The
Letter of Transmittal states that by so acknowledging and by delivering this
Prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction of all of the conditions to the Exchange Offer, the
Company will accept, promptly after the Expiration Date, all Old Notes properly
tendered and will issue the New Notes promptly after acceptance of the Old
Notes. See "--Certain Conditions to the Exchange Offer" below. For purposes of
the Exchange Offer, the Company shall be deemed to have accepted properly
tendered Old Notes for exchange when, as and if the Company has given oral
(promptly confirmed in writing) or written notice thereof to the Exchange Agent.
For each Old Note accepted for exchange, the Holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. Accordingly, registered Holders of New Notes on the relevant record
date for the first interest payment date following the consummation of the
Exchange Offer will receive interest accruing from the most recent date to which
interest has been paid on the Old Note, or, if no interest has been paid, from
March 3, 1998. Old Notes accepted for exchange will cease to accrue interest
from and after the date of consummation of the Exchange Offer. Pursuant to the
Registration Rights Agreement, certain Liquidated Damages are required to be
made to Holders of Old Notes under certain circumstances relating to the timing
of the Exchange Offer and to other registration requirements contained therein.
Holders of Old Notes, who tender such Notes in the Exchange Offer agree to waive
any accrued but unpaid Liquidated Damages on such Old Notes. An amount equal to
the amount of accrued and unpaid Liquidated Damages on Old Notes tendered in the
Exchange Offer shall be payable to registered holders of New Notes on the record
date for the first interest payment following the consummation of the Exchange
Offer.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of (i) certificates for such Old Notes or a timely
Book-Entry Confirmation of such Old Notes into the Exchange Agent's account at
the Book-Entry Transfer Facility, (ii) a properly completed and duly executed
Letter of Transmittal or an Agent's Message in lieu thereof and (iii) all other
required documents. If any tendered Old Notes are not accepted for any reason
set forth in the terms and conditions of the Exchange Offer or if Old Notes are
submitted for a greater principal amount than the Holder desires to exchange,
such unaccepted or non-exchanged Old Notes will be returned without expense to
the tendering Holder thereof (or, in the case of Old Notes tendered by
book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility pursuant to the book-entry procedures described below, such
non-exchanged Old Notes will be credited to an account maintained with such
Book-Entry Transfer Facility) as promptly as practicable after the expiration or
termination of the Exchange Offer.
BOOK-ENTRY TRANSFERS
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer Facility
systems
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<PAGE>
must make book-entry delivery of Old Notes by causing the Book-Entry Transfer
Facility to transfer such Old Notes into the Exchange Agent's accounts at the
Book-Entry Transfer Facility in accordance with such Book-Entry Transfer
Facility's Automated Tender Offer Program ("ATOP") procedures for transfer. Such
participant using ATOP should transmit its acceptance to the Book-Entry Transfer
Facility on or prior to the Expiration Date or comply with the guaranteed
delivery procedures described below. The Book-Entry Transfer Facility will
verify such acceptance, execute a book-entry transfer of the tendered Old Notes
into the Exchange Agent's account at the Book-Entry Transfer Facility and then
send to the Exchange Agent confirmation of such book-entry transfer, including
an Agent's Message confirming that the Book-Entry Transfer Facility has received
an express acknowledgment from such participant that such participant has
received and agrees to be bound by the Letter of Transmittal and that the
Company may enforce the Letter of Transmittal against such participant. However,
although delivery of Old Notes may be effected through book-entry transfer at
the Book-Entry Transfer Facility, an Agent's Message and any other required
documents, must, in any case, be transmitted to and received by the Exchange
Agent at the address set forth below under "--Exchange Agent" on or prior to the
Expiration Date or the guaranteed delivery procedures described below must be
complied with.
GUARANTEED DELIVERY PROCEDURES
If a Holder of the Old Notes desires to tender such Old Notes and the Old
Notes are not immediately available, or time will not permit such Holders' Old
Notes or other required documents to reach the Exchange Agent before the
Expiration Date, or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if (i) the tender is made through an
Eligible Institution, (ii) prior to the Expiration Date, the Exchange Agent
received from such Eligible Institution a Notice of Guaranteed Delivery,
substantially in the form provided by the Company (by telegram, telex, facsimile
transmission, mail or hand delivery), setting forth the name and address of the
Holder of the Old Notes and the amount of Old Notes tendered, stating that the
tender is being made thereby and guaranteeing that within five New York Stock
Exchange ("NYSE") trading days after the date of execution of the Notice of
Guaranteed Delivery, the certificates for all physically tendered Old Notes, in
proper form for transfer, or a Book-Entry Confirmation, as the case may be,
together with a properly completed and duly executed appropriate Letter of
Transmittal (or facsimile thereof or Agent's Message in lieu thereof) with any
required signature guarantees and any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the Exchange
Agent, and (iii) the certificates for all physically tendered Old Notes, in
proper form for transfer, or a Book-Entry Confirmation, as the case may be,
together with a properly completed and duly executed appropriate Letter of
Transmittal (or facsimile thereof or Agent's Message in lieu thereof) with any
required signature guarantees and all other documents required by the Letter of
Transmittal, are received by the Exchange Agent within five NYSE trading days
after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date. For a withdrawal to be effective, a
written notice of withdrawal must be received by the Exchange Agent at one of
the addresses set forth below under "--Exchange Agent." Any such notice of
withdrawal must (i) specify the name of the person having tendered the Old Notes
to be withdrawn, (ii) identify the Old Notes to be withdrawn (including the
principal amount of such Old Notes), (iii) contain a statement that such Holder
is withdrawing his election to have such Old Notes exchanged, (iv) be signed by
the Holder in the same manner as the original signature on the Transmittal
Letter by which such Old Notes were tendered (including any signature
guarantees) or be accompanied by documents of transfer to have the Trustee with
respect to the Old Notes register the transfer of such Old Notes in the name of
the person withdrawing the transfer, and (v) (where certificates for Old Notes
have been transmitted) specify the name in which such Old Notes are registered,
if different from that of the withdrawing Holder. If certificates for Old Notes
have been delivered or otherwise identified to the
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<PAGE>
Exchange Agent, then, prior to the release of such certificates the withdrawing
Holder must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless such Holder is an Eligible Institution. If Old Notes
have been tendered pursuant to the procedure for book-entry transfer described
above, any notice of withdrawal must specify the name and number of the account
at the Book-Entry Transfer Facility to be credited with the withdrawn Old Notes
and otherwise comply with the procedures of such facility. All questions as to
the validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company, whose determination shall be final and
binding on all parties. Any Old Notes so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the Exchange Offer. Any Old
Notes which have been tendered for exchange but which are not exchanged for any
reason will be returned to the Holder thereof without cost to such Holder (or,
in the case of Old Notes tendered by book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry
transfer procedures described above, such Old Notes will be credited to an
account maintained with such Book-Entry Transfer Facility for the Old Notes), as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following one
of the procedures described under "--Procedures for Tendering Old Notes" above
at any time on or prior to 5:00 p.m., New York City time, on the Expiration
Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company shall
not be required to accept for exchange, or to issue New Notes in exchange for,
any Old Notes and may terminate or amend the Exchange Offer, if at any time
before the acceptance of such Old Notes, the Exchange Offer violates any
applicable law or regulation or interpretation of the Staff of the Commission.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its reasonable discretion. The failure by the Company at
any time to exercise any of the foregoing rights shall not be deemed a waiver of
any such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes, if
at such time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939, as
amended.
EXCHANGE AGENT
U.S. Bank Trust National Association has been appointed as the Exchange
Agent for the Exchange Offer. All executed Letters of Transmittal should be
directed to the Exchange Agent at the address set forth below. Questions and
requests for assistance, requests for additional copies of this Prospectus or of
the Letter of Transmittal and requests for Notices of Guaranteed Delivery should
be directed to the Exchange Agent addressed as follows:
44
<PAGE>
Delivery to: U.S. Bank Trust National Association,
As Exchange Agent
<TABLE>
<CAPTION>
BY HAND: BY MAIL:
<S> <C>
U.S. Bank Trust National Association U.S. Bank Trust National Association
Attn: Specialized Finance Attn: Specialized Finance
180 East Fifth Street 180 East Fifth Street
St. Paul, Minnesota 55101 St. Paul, Minnesota 55101
BY OVERNIGHT COURIER: BY FACSIMILE:
U.S. Bank Trust National Association (651) 244-1537
Attn: Specialized Finance Attn: Specialized Finance
180 East Fifth Street Telephone: (651) 244-0721
St. Paul, Minnesota 55101
</TABLE>
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF SUCH LETTER OF TRANSMITTAL VIA FACSIMILE OTHER THAN AS
SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF
TRANSMITTAL.
FEES AND EXPENSES
The Company will not make any payment to brokers, dealers, or others
soliciting acceptances of the Exchange Offer except for reimbursement of mailing
expenses.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
approximately $400,000.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection with that exchange, as well as any other sale
or disposition of the Old Notes. However, Holders who instruct the Company to
register New Notes in the name of, or request that Old Notes not tendered or not
accepted in the Exchange Offer be returned to, a person other than the
registered tendering Holder will be responsible for the payment of any
applicable transfer tax thereon.
CONSEQUENCES OF NOT EXCHANGING OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions in
the Indenture regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon as
a consequence of the issuance of the Old Notes pursuant to exemptions from, or
in transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
they will register under the Securities Act any Old Notes which remain
outstanding after consummation of the Exchange Offer (subject to certain limited
exceptions, if applicable). To the extent that Old Notes are not tendered and
accepted in the Exchange Offer, a holder's ability to sell such untendered Old
Notes could be adversely affected.
Holders of the New Notes and any Old Notes which remain outstanding after
consummation of the Exchange Offer will vote together as a single class for
purposes of determining whether holders of the requisite percentage thereof have
taken certain actions or exercised certain rights under the Indenture.
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Upon consummation of the Exchange Offer, holders of Old Notes will not be
entitled to any Liquidated Damages or any further registration rights under the
Registration Rights Agreement, except under limited circumstances. See
"Description of Notes--Exchange Offer; Registration Rights."
CONSEQUENCES OF EXCHANGING OLD NOTES
Based on interpretations by the staff of the Commission, as set forth in
no-action letters issued to third parties, the Company believes that New Notes
issued pursuant to the Exchange Offer in exchange for Old Notes may be offered
for resale, resold or otherwise transferred by Holders thereof (other than any
such Holder which is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery requirements of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such Holder's business and such
Holder has no arrangement or understanding with any person to participate in the
distribution of such New Notes. However, the Commission has not considered the
Exchange Offer in the context of a no-action letter and there can be no
assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer as in such other circumstances. Each Holder,
other than a broker-dealer, must acknowledge that it is not engaged in, and does
not intend to engage in, a distribution of such New Notes and has no arrangement
or understanding to participate in a distribution of New Notes. If any Holder is
an affiliate of the Company and is engaged in or intends to engage in or has any
arrangement or understanding with respect to the distribution of the New Notes
to be acquired pursuant to the Exchange Offer, such Holder (i) could not rely on
the applicable interpretations of the staff of the Commission and (ii) must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. Each broker-dealer
that receives New Notes for its own account in exchange for Old Notes must
acknowledge that such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities and that it will deliver
this Prospectus in connection with any resale of such New Notes. See "Plan of
Distribution." In addition, to comply with the securities laws of certain
jurisdictions (including any jurisdiction outside the United States), the New
Notes may not be offered or sold unless they have been registered or qualified
for sale in such jurisdiction or an exemption from registration or qualification
is available and is complied with. The Company has agreed, pursuant to the
Registration Rights Agreement, subject to certain limitations specified therein,
to register or qualify the New Notes for offer or sale under all applicable
state or Blue Sky securities laws by the time the Registration Statement (of
which this Prospectus forms a part) is declared effective by the Commission.
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BUSINESS
THE COMPANY
The Company is a leading provider of outsourced manufacturing and packaging
services to the North American health and beauty aid market on the basis of
sales. Over 75% of the Company's revenues are derived from the manufacturing and
packaging of health and beauty aid products, including lipstick, face powder,
eye shadow, mascara, nail enamel, skin care cream and lotion, hair spray and
gel, shampoo and shaving cream and gel. Other products manufactured and packaged
by the Company include household and automotive products such as lubricant,
household cleaners and lighter fluid. OSG offers its customers a complete range
of services, including product conceptualization, formulation, manufacturing,
filling and packaging. It also provides ancillary services such as materials
procurement, warehousing and distribution of finished goods. The Company has
developed hundreds of proprietary products that have been placed into
distribution by its customers in national and international consumer markets.
Management estimates that a majority of the Company's revenues are derived from
products that OSG has formulated. The Company has six manufacturing facilities
strategically located in the United States and Canada, in addition to facilities
in Australia and Mexico. Management believes OSG is the largest independent
contract manufacturer and packager of color cosmetics, high-end salon aerosol
hair care products and shaving creams and gels in North America. The Company had
revenues of $79.8 million, $110.3 million and $115.0 million for the years ended
December 31, 1996 and 1997 and for the six month period ended June 27, 1998,
respectively. The Company had net losses of $6.2 million, $1.5 million and $2.2
million for the years ended December 31, 1996 and 1997 and for the six month
period ended June 27, 1998, respectively.
The Company's customers include over 350 companies that market branded
and/or private label consumer products in the health and beauty aid, household
and automotive markets. Customers include Mary Kay Corp. ("Mary Kay"), Sebastian
International Inc. ("Sebastian") and WD-40 Co. ("WD-40"), as well as other
nationally branded marketers and numerous regional or niche marketers. The
Company's top ten customers have been with the Company for 17 years on average,
and nine of those top ten have been customers for at least ten years. The
Company believes that its ability to develop long-term relationships is due to
its product formulation expertise, manufacturing reliability, consistent product
quality and timely delivery. Many of OSG's customers lack in-house manufacturing
capabilities and outsource their manufacturing and packaging requirements in
order to focus on marketing. Management estimates that a majority of the
Company's revenues are derived from customers that do not have in-house
manufacturing capabilities for the products OSG manufactures. Companies with the
necessary in-house manufacturing capabilities utilize the Company's services for
new product launches, lower volume brands and to supplement internal capacity.
Contract manufacturers and packagers manufacture products to customer
specifications and fill containers for a wide range of industries. Contract
manufacturers typically charge a per-unit fee which varies depending on: (i) the
type of product, (ii) the type of services provided (filling only versus product
development, formulation, materials procurement, etc.), (iii) the container size
and order quantity, and (iv) the complexity of the manufacturing and packaging
process. The contract manufacturing and packaging industry is highly fragmented,
with hundreds of independent companies typically providing a narrow scope of
services in limited geographic areas. Competition is based principally on
formulation capabilities, product quality, reputation, service, dependability,
and cost-effectiveness. When the cost of distribution is a significant factor in
the total product cost or if customers desire geographic proximity to suppliers,
competition tends to be regionally based. Management believes that few
competitors offer the scale, expertise, reputation and range of services that
the Company provides.
COMPETITIVE STRENGTHS
OSG attributes its leading market position to the following factors:
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FORMULATION EXPERTISE. Management believes that OSG is highly regarded for
its product formulation capabilities. OSG's research and development chemists
have developed hundreds of proprietary products on behalf of its customers that
have been placed into distribution. Products developed by OSG include numerous
hair care products, such as hair sprays for the high-end salon market, color
cosmetics, such as long-lasting silicone lipstick and other products, including
a new product for WD-40. In addition, OSG is at the forefront of the
reformulation of aerosol products in response to changing government
regulations. Management believes that the Company's formulation expertise is
highly valued by its customers, resulting in greater customer loyalty and the
opportunity for revenue growth. Management estimates that a majority of the
Company's revenues are derived from products that OSG has formulated.
LONG-STANDING CUSTOMER RELATIONSHIPS. The Company believes that its strong,
long-standing customer relationships provide it with a distinct competitive
advantage. OSG provides contract manufacturing and packaging services to over
350 customers worldwide, including some of the best-known and most successful
consumer product companies. OSG's top ten customers have been customers for over
17 years on average, and include Sebastian, Mary Kay and WD-40. All but one of
the top-ten customers have used the Company's services for more than ten years.
LEADER IN NICHE MARKETS. The Company focuses on market sectors requiring
specialized manufacturing and/or formulation capabilities such as color
cosmetics, high-end salon aerosol hair care products and shaving creams and
gels. As a result of its value-added manufacturing and formulation services,
management believes that it is able to retain customers and obtain higher profit
margins than contract packagers of commodity-type products. Management believes
the Company is the leading contract manufacturer and packager of color
cosmetics, high-end salon aerosol hair care products and shaving creams and gels
in North America on the basis of sales.
FULL SERVICE CAPABILITIES. The Company offers a full array of services,
including materials procurement, blending, filling, packaging, warehousing and
distribution. The Company's full service product offering and manufacturing
expertise provides it with a competitive advantage in keeping existing customers
and attracting new ones. OSG's size, capabilities and reputation make it one of
the few contract manufacturers and packagers in the health and beauty aid
markets capable of supporting large scale production runs and product launches
for customers such as Mary Kay.
MANUFACTURING EXPERTISE. The Company has the equipment and manufacturing
expertise required to manufacture and package a wide variety of color cosmetic,
aerosol, cream, lotion and liquid products while adhering to strict product
specifications for its customers. For example, the Company is able to fill
complex containers such as barrier packs (pressurized, non-aerosol containers),
which have made it a leader in manufacturing and packaging products such as
shaving gels. As a result of these capabilities, the Company is a highly valued
partner to its customers, providing consistently high quality products in a
timely, cost-effective manner. As further evidence of OSG's manufacturing
expertise and quality operations, all four of the Company's facilities that
manufacture and package products for Procter & Gamble, have been awarded Procter
& Gamble's prestigious Pinnacle Award for Good Manufacturing Practices.
STRATEGIC LOCATIONS. OSG's facilities are strategically located to service
regional, national and international customers. With its largest color cosmetics
facility located in New York City, the Company is close to the fashion and
cosmetic industry. In addition, management believes the Company is the largest
independent aerosol packager on the West Coast and in the Southeast. OSG can
manufacture and package various products at each of its facilities, creating
flexibility in servicing its geographically diverse customers in a
cost-effective manner. The Company's facilities in Mexico and Australia serve
the requirements of both international and local customers.
EXPERIENCED MANAGEMENT TEAM. OSG's management team, headed by the former
President of Kolmar, Christopher Denney, has extensive industry experience. Upon
joining Kolmar in 1994, Mr. Denney implemented numerous initiatives that
increased sales and returned Kolmar to profitability.
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Members of senior management have spent a majority of their careers in the
packaging industry, averaging 24 years of experience. In addition, Walter K.
Lim, the founder of ASC, serves as Chairman of OSG, and Samuel D. Garretson, the
founder of Piedmont, serves as a director of OSG.
BUSINESS STRATEGY
The Company intends to increase its sales and profitability by capitalizing
on its product conceptualization and formulation expertise and its
cost-effective, quality manufacturing capabilities. In addition, management
believes that it can continue to improve the Company's operating results by
implementing the following strategies:
CAPITALIZE ON CROSS-SELLING OPPORTUNITIES. OSG intends to capitalize on the
combination of each of its subsidiaries' respective customer bases, product
lines and geographical locations. The Company expects to increase product
penetration of its customer base by capturing business that previously exceeded
each of its subsidiaries' particular areas of expertise. For example, the
Company has developed proprietary color cosmetics formulations for Sebastian
International, Inc., a customer that traditionally focused on hair care
products, and expects to offer color cosmetic products to other hair care
product customers. In addition, the Company can offer its aerosol capabilities
to its color cosmetics customers. The geographic diversity of OSG's facilities
allows the Company to offer its customers multiple production locations.
CENTRALIZE SALES AND MARKETING. Historically, OSG has managed its sales
efforts at the plant level. The Company plans to centralize the management of
its sales efforts in order to improve communication with customers, to
cross-sell services to customers and to ensure uniform pricing and sales
strategies. The Company plans to establish a group specifically focused on
promoting innovation within OSG and to its customers. This innovation group will
be responsible for identifying market trends and assisting customers with new
product ideas, as well as promoting the Company through customer presentations,
advertising and trade shows. Local sales and management staff will continue to
maintain close ties with customers and production facilities. The centralized
sales effort will enable the Company to serve national accounts more effectively
and to pursue customers located outside the local marketing reach of each
individual plant.
INCREASE INTERNATIONAL PRESENCE. As a result of increased international
demand for cosmetic products, global cosmetics companies have started to expand
into markets such as Eastern Europe, Latin America and the Asia-Pacific region.
OSG intends to capitalize on this trend by increasing its export sales and
selectively entering into joint ventures and licensing agreements. The Company
currently has licensing agreements in Japan, Korea, Thailand and Poland. In
addition, the Company plans to continue to develop its own "control" brands --
brands for which OSG owns the formulas and manufactures and packages the
products to its own specifications, leaving the marketing, promotion and
distribution to its customer. To date, OSG has developed two control brands
which are manufactured at its Mexico facility--"Veronique," which is primarily
exported to Russia, and "Maria," a brand targeted at Latin American markets.
REDUCE MANUFACTURING COSTS. The Company continues to improve its
cost-effectiveness by investing in productivity enhancements and implementing
operational improvements. The Company believes that the combination of ASC,
Kolmar and Piedmont will result in cost reductions from (i) allocating
production among facilities to better optimize the use of labor and equipment;
(ii) eliminating redundant administrative operations; and (iii) in certain
cases, purchasing larger amounts of raw materials on more favorable terms.
PURSUE STRATEGIC ACQUISITIONS. Management intends to pursue acquisitions to
expand into new product lines, niche markets and new geographic areas. The
Kolmar Acquisition represents a continuation of OSG's strategy to provide more
services to existing and potential customers in the highly fragmented contract
manufacturing and packaging industry. OSG plans to acquire companies that will
provide additional cross-selling and cost-reduction opportunities.
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CUSTOMERS AND PRODUCTS
The Company's customers include over 350 companies that market branded
and/or private label consumer products in the health and beauty aid, household
and automotive markets. OSG's customers vary in size from large, international,
branded consumer product companies with diverse product lines to small,
entrepreneurial companies with narrower product offerings. The Company
specializes in the manufacturing of color cosmetic, aerosol, cream, lotion and
liquid products.
COLOR COSMETIC PRODUCTS. Color cosmetic products include lipstick, face
powder, eye shadow, mascara and nail enamel. The Company manufactures and
packages color cosmetics for the entire range of major cosmetic market sectors
from budget to high-end. Management estimates that retail revenues in the color
cosmetics industry were approximately $3.3 billion in 1996 (representing an
approximate 3.6% annual growth rate since 1993). In order to respond to and
drive fashion trends, marketers continually change their product offerings. By
offering product conceptualization and formulation expertise and manufacturing
flexibility, the Company helps its customers remain current with market trends.
Management believes that the Company is the largest independent contract
manufacturer of color cosmetics in North America on the basis of sales. For the
three month period ended March 28, 1998, 1997 and 1996, OSG's revenues from
color cosmetic products were $15.1 million, $14.6 million and $15.0 million,
representing approximately 28.1%, 27.5% and 30.6% of revenues, respectively.
OSG's customers for color cosmetic products include Mary Kay and Sebastian.
AEROSOL PRODUCTS. Aerosol products include a broad range of products such
as hair spray, shaving cream and gel, lubricant, non-stick cooking spray and
household cleaning products. The aerosol system is one of the most effective
forms of delivering products in a cost-effective manner, while providing dosage
control, sanitary use and convenience. Management estimates that in 1996, over
approximately 3.2 billion aerosol units were filled in the United States
(representing an approximate 1.8% annual growth rate since 1990). The aerosol
products market has undergone significant change as certain states have enacted
regulations requiring reduced VOC emissions, resulting in the reformulation of
aerosol products to meet these new standards. The Company has reformulated over
100 products in response to legislative changes. Not only must packagers of
aerosol products obtain government permits, but the packaging process also
requires specialized equipment and expertise.
The Company's success in the aerosol market is enhanced by its product
conceptualization, formulation and technological capabilities. The Company has
technological expertise with complex delivery systems such as barrier packs
(non-aerosol, pressurized products). In addition, many high-end salon aerosol
hair care companies rely on the Company's formulation expertise, making it the
largest aerosol contract manufacturer and packager of high-end hair care
products in North America on the basis of sales.
In addition to its success in the health and beauty aid industry, the
Company produces several aerosol products for the household and automotive
markets, including lubricants, bathroom cleaners, tire sealers and dry wall
repair products.
Management believes that the Company is the second largest independent
aerosol contract manufacturer and packager in North America and the largest in
shaving creams and gels, on the basis of sales. For the three month period ended
March 28, 1998, 1997, and 1996, OSG's revenues from aerosol products were $22.9
million, $22.2 million and $21.4 million, representing approximately 42.5%,
41.9% and 43.7% of revenues, respectively.
OSG's customers for aerosol products include Sebastian and WD-40.
CREAM, LOTION AND LIQUID PRODUCTS. Creams and lotions consist of skin care
products such as facial preparations, hand and body care products, sun care and
anti-aging products. Management estimates that the skin care market is one of
the largest and fastest growing sectors of the health and beauty aid market,
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estimated at $6 billion in revenues in 1996 (representing an approximate 7.5%
annual growth rate since 1993). The Company began emphasizing skin care products
in 1994 after recognizing the growth potential in this market, and such products
have grown to approximately 20% of the Company's revenues. Other liquid products
manufactured and packaged by OSG include shampoo, conditioner, fragrance, pump
hair spray and gel and non-aerosol deodorant, as well as products for the
household and automotive markets such as lighter fluid, lubricant and cleaning
products.
For the three month period ended March 28, 1998, 1997, and 1996, OSG's
revenues from cream, lotion and liquid products were $15.9 million, $16.2
million and $12.6 million, representing approximately 29.4%, 30.6% and 25.7% of
revenues, respectively.
OSG's customers for cream, lotion and liquid products include Sebastian and
WD-40 (3-in-1 Oil).
MARKETING AND SALES
The Company has 14 full-time sales representatives located at the Company's
various manufacturing facilities. The Company's sales efforts are supported by
35 in-house customer service representatives who ensure timely delivery of
products and services. The Company plans to centralize the management of its
sales efforts in order to improve its communications with customers, to
cross-sell its services to customers, and to ensure uniform pricing and sales
strategies. Coordination of these efforts will occur at the national level and
at each facility. Marketing will include a small group specifically focused on
promoting innovation within OSG and to its customers. This innovation group will
be responsible for increasing customer demand for OSG products by following
market trends, suggesting new product ideas and promoting the Company through
customer presentations, advertising and trade shows. Other members of the sales
and management staff will continue to be located at each plant in order to
maintain close ties with local customers and the production side of the
business.
FORMULATION
Management believes that OSG is highly regarded for its product formulation
capabilities. The Company's laboratory facilities are staffed with development
chemists and microbiologists who have developed hundreds of proprietary products
on behalf of the Company's customers that have been placed into distribution.
Products developed by OSG include numerous hair care products, such as hair
spray for the high-end salon market, color cosmetics, such as long-lasting
silicone lipstick and other products, including a new product for WD-40. The
Company's formulation expertise allows it to adapt customer formulations, which
may have been originally developed on a small scale, into formulas that can be
manufactured in large scale batch formulations. Additionally, the Company is
able to act as a fast-follower in developing products for customers shortly
after such products have been successfully launched by other marketers. OSG is
also at the forefront of the reformulation of aerosol products in response to
changing government regulations. Management believes that the Company's
formulation expertise is highly valued by its customers, resulting in greater
customer loyalty and opportunity for revenue growth. Management estimates that a
majority of the Company's revenues are derived from products that OSG has
formulated.
RAW MATERIALS
Some of OSG's customers provide raw materials for product manufacturing and
packaging, while in other cases, OSG procures raw materials for its customers.
If customers supply raw materials, the Company charges only a per unit fill fee
for its services. In the event OSG purchases raw materials from third party
suppliers, OSG passes the cost of such materials on to its customers, and
charges a handling fee in addition to the fill fee. Raw materials are purchased
from approved suppliers by the Company's buyers to meet specific production
requirements and customer specifications. The Company's primary raw materials
consist of cans, propellants, chemicals, valves, oils, talc, wax, colorants,
fragrances, thickeners, caps, bottles, cartons and tubes. While OSG strives to
maintain close relationships with its suppliers, the Company generally does not
enter into long-term contracts with them. The Company is not reliant on any
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one supplier for any of its raw materials. Additionally, certain key customers
have recently changed the way materials are sourced, resulting in greater
reliance on the Company. This gives OSG greater control over its production
planning and inventory levels.
PRODUCTION AND MANUFACTURING
The Company's manufacturing process results in timely delivery of high
quality products to customers on a cost-effective basis. OSG provides its
customers with a full range of services including product conceptualization,
formulation, manufacturing, filling and packaging, materials procurement,
warehousing and shipping of finished goods. The manufacturing process
incorporates several distinct steps which require coordination in order to
ensure flexibility and short lead times, match product standards and achieve
high throughput. Certain manufacturing operations within the facilities are
compartmentalized (e.g., all lipsticks are manufactured and packaged in one area
of the facility) in order to enhance quality control and minimize the potential
for cross contamination of products.
In connection with each order, OSG procures raw materials for products and
packaging or accepts delivery of such materials from its customers. The raw
materials are inspected by quality control, after which OSG manufactures the
product in batches. When the batch is complete, quality assurance testing is
performed. In addition to the Company's own rigorous quality assurance
procedures, several of OSG's customers specify additional levels of testing
throughout the formulation and manufacturing process. OSG fills the product into
packaging containers for shipment to customers or in some instances ships the
final product batch in bulk form to its customers.
COMPETITION
The contract manufacturing and packaging industry is highly fragmented. OSG
not only competes with other independent contract manufacturers, but also with
marketers that have self-manufacturing capabilities. Competition is based
principally on formulation capabilities, quality, reputation, service,
dependability, and cost-effectiveness. When the cost of distribution is a
significant factor in the total product cost, or if customers desire geographic
proximity to suppliers for faster service and closer communication, competition
tends to be regionally based. Management believes that few competitors offer the
scale, expertise, reputation and range of services that the Company provides.
Management also believes that there are hundreds of contract manufacturers and
packagers servicing the color cosmetic, aerosol, cream, lotion and liquid
products markets. OSG's main competitors in these market sectors include
Intercos Italia Spa, Davlyn Industries Inc., CCL, Accra-Pac Group, Bocchi
Laboratories, Inc., Cosmetic Essence Inc., Shield Packaging Co., Fluid Packaging
Co., Inc., San-Mar Laboratories, Packaging Advantage Corporation and
Alberto-Culver (Cosmetic Labs).
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PROPERTIES
The following table sets forth information with respect to OSG's facilities
and the products manufactured at such facilities.
<TABLE>
<CAPTION>
APPROXIMATE
FACILITY SQ. FT. (000S) MARKET SECTORS(1) OWNERSHIP(2)
- ----------------------------------------------------- ----------------- ------------------------ ------------
<S> <C> <C> <C>
MANUFACTURING
City of Industry, CA (3)........................... 60 aerosols and liquids Leased
Gainesville, GA (4)................................ 98 aerosols and liquids Owned
Port Jervis, NY.................................... 264 cosmetics and liquids Owned
Corona, CA......................................... 112 cosmetics and liquids Leased
East Stroudsburg, PA............................... 30 cosmetics and liquids Owned
Barrie, Ontario.................................... 108 cosmetics and liquids Owned
Tlalnepantla, Mexico............................... 111 cosmetics and liquids Owned
Hornsby, Australia................................. 82 cosmetics and liquids Owned
WAREHOUSING
City of Industry, CA (4)........................... 122 Leased
Gainesville, GA (4)................................ 146 Leased
Port Jervis, NY.................................... 34 Leased
Cuautitlan, Mexico (4)............................. 58 Owned
</TABLE>
- ------------------------
(1) Liquids include cream, lotion and liquid products.
(2) Leased facilities have terms expiring from 1998-2013.
(3) Includes current corporate offices for OSG. Management intends to relocate
its headquarters during 1998.
(4) Consists of multiple facilities.
In addition to the above, the Company owns property in Sommersby, Australia
and Jalisco, Mexico, and leases corporate office space in New York, NY, none of
which management believes is material to the Company's business.
EMPLOYEES
As of June 27, 1998, after giving effect to the Kolmar Acquisition, OSG
employed approximately 2,060 persons, of which approximately 440 are salaried
and approximately 1,520 are compensated on an hourly basis. In addition, the
Company utilizes local labor contract suppliers to provide a significant portion
of its production labor force. None of OSG's employees in the United States
belong to a union. Approximately 200 of OSG's employees in Mexico belong to a
union and approximately 80 of OSG's employees in Australia belong to one of two
unions. The Australia and Mexico union contracts expire in 1999 and 1998,
respectively. The Company has not experienced a significant work stoppage with
its employees. Management believes that its employee and union relationships are
good. The Company has employment agreements with certain key personnel. See
"Management-Employment Agreements."
TRADE NAMES, TRADEMARKS, FORMULAS AND PATENTS
OSG owns certain trade names, trademarks, formulas and patents which are
used in its business. Management believes that its development and formulation
expertise, manufacturing experience and know-how are more critical in
maintaining and growing its business than patents or trademarks. Consistent with
industry practice, management does not patent its proprietary formulas.
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LEGAL PROCEEDINGS
From time to time, OSG and its subsidiaries may become party to various
legal proceedings involving routine claims which are incidental to their
businesses. The legal and financial liability of OSG and its subsidiaries with
respect to such matters cannot be estimated at the present time, but OSG and its
subsidiaries do not expect that such matters would have a material adverse
effect on the business, results of operations or financial condition of OSG
taken as a whole.
ENVIRONMENTAL ISSUES, COMPLIANCE AND GOVERNMENT REGULATION
ENVIRONMENTAL REGULATION AND COMPLIANCE. The Company's operations and
properties are subject to Environmental Laws. Violations of Environmental Laws
can result in civil or criminal penalties or in cease and desist or other orders
against the Company. In addition, the Company may be required to spend material
amounts to comply with Environmental Laws, and may be liable with respect to
contamination of sites currently or formerly owned or operated by the Company or
with respect to the off-site disposal of hazardous substances. Based upon the
Company's experience to date, as well as certain indemnification agreements
obtained in connection with the Kolmar Acquisition, the ASC acquisition and the
Piedmont acquisition, and certain insurance coverages, the Company believes that
the future cost of compliance with existing Environmental Laws and its liability
for identified environmental claims will not have a material adverse effect on
the Company's business, results of operations or financial condition. There can
be no assurance, however, that the Company's obligations in this regard will not
have such an effect or that the existing indemnities and insurance will be
sufficient to fund such liabilities. Furthermore, future events, such as new
information, or changes in Environmental Laws (or in their interpretation or
enforcement by courts or governmental agencies) may give rise to additional
costs or claims that could have a material adverse effect on the Company's
business, results of operations or financial condition.
Certain environmental laws, such as CERCLA and analogous state laws, impose
liability for the investigation and remediation of hazardous substances released
into the environment. Courts have interpreted CERCLA to impose strict, and in
some circumstances, joint and several, liability on all PRPs at a site if the
harm is indivisible, which means that one PRP could be held liable for the
entire cost of cleanup at a site where multiple parties contributed to the
contamination. As a practical matter, however, the costs typically are
allocated, according to a volumetric or other standard, among the PRPs. Under
CERCLA and analogous state laws, the Company may incur liability for
contamination at properties presently or formerly owned or operated by the
Company or its subsidiaries or predecessors (including contamination caused by
the Company's predecessors or prior owners or operators of such sites), or at
properties where such entities sent waste for off-site treatment or disposal.
In that regard, ASC's operations are located within the boundaries of the
Puente Valley Operable Unit ("OU") of the San Gabriel Valley Superfund Site.
Prior to the Company's purchase of ASC, the EPA identified ASC as one of more
than five hundred PRPs for the Puente Valley OU. Subsequently, ASC and
forty-three other PRPs entered into a consent agreement to fund certain
investigatory work, which work was completed in 1997. To date, the EPA has not
finally determined the remedial work that will be required at the site; however,
the EPA has issued estimates for the remedial alternatives it is considering
which range from approximately $28 million to $51 million. In connection with
the Company's purchase of ASC, the sellers (who currently own the property on
which ASC operates) agreed to indemnify the Company with respect to the Puente
Valley OU proceeding and certain other environmental matters. Certain of the
Company's leases with the sellers also provide for off-sets to the Company's
rental obligations in the event that the Company incurs liability for such an
indemnified matter. Based on this indemnity, the lease off-set rights, recent
EPA cost estimates of the proposed cleanup alternatives and certain preliminary
estimates of ASC's share of liability, the Company believes, although there can
be no assurance, that ASC's liability at this site will not be material. In
addition, prior to the Company's acquisition, the Los Angeles Regional Water
Quality Control Board ("RWQCB") requested that ASC conduct certain soil and
groundwater investigation and remediation on its property. ASC has conducted
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the requested investigations and the RWQCB has approved ASC's remediation plan.
Although there can be no assurance, the Company does not believe that the costs
of remediation will be material. This remediation is also the subject of the
above-referenced indemnity.
Also, in regard to CERCLA, Kolmar and a former affiliate, Wickhen Products
("Wickhen"), have been identified as the two principal PRPs at the Carroll &
Dubies Superfund Site in Port Jervis, New York. The EPA has estimated that it
will cost $8.8 million to clean up the site. Under current allocation estimates,
Kolmar and Wickhen will be responsible for most of these costs. Kolmar and
Wickhen's insurer has accepted coverage of this claim, and presently is
controlling the defense and paying related costs. It is anticipated that the
insurance coverage will be sufficient to pay for the estimated remedial costs.
In addition, the Company has received a full indemnity for liability at this
site from CCL. Based on the foregoing, the Company does not believe that the
Company's liability at this site will be material. Kolmar also has been
identified as a PRP at several other sites where it sent waste for off-site
disposal. In addition, another site where a Kolmar affiliate formerly operated
currently is undergoing remediation under the direction of a state agency. Based
on currently available information concerning the estimated remediation costs
and the responsibility of other parties for contamination at these sites, as
well as the insurance coverage and the indemnity for these matters from CCL, the
Company does not believe that Kolmar's related liability will have a material
adverse effect on the Company's business, results of operations or financial
condition. There can be no assurance, however, that these matters will not have
such an effect, or that the Company will not incur liability at additional sites
in the future.
Piedmont's owned facility in Gainesville, Georgia is listed on the State of
Georgia's Hazardous Site Inventory ("HSI") of environmentally impacted sites due
to the detection of chlorinated solvents in the groundwater beneath the
facility. Piedmont has requested that the state agency remove the facility from
the HSI based upon Piedmont's understanding that no persons are exposed to
groundwater that may have been impacted by the facility. There can be no
assurance, however, that the Company's proposal will be approved by the state as
submitted or that the state will delist the site without requiring further
remedial action. The former owners of Piedmont have provided a partial indemnity
for remediation costs incurred at the facility. The Company believes that its
share of remediation costs, if any, will not have a material adverse effect on
the Company.
The Company also faces risks relating to federal and state environmental
regulation of VOCs. Recently enacted or future legislation requiring reductions
in the use of these propellants could materially adversely affect the Company's
business if the industry does not develop propellant technology and product
formulations to meet such future standards. California and New York recently
have mandated reductions in VOCs in aerosol products, and it is possible that
Georgia and other states may in the future pass similar legislation or enact
regulations. All of the Company's products meet the current regulatory
standards, and management believes, although there can be no assurance, that
propellant technology and product formulations will be developed that meet the
future standards. See "--Environmental Issues, Compliance and Government
Regulation."
ERISA. Management believes that OSG is in material compliance with all laws
and regulations governing its employee benefit plans. Management believes OSG
has sufficient cash flow to meet its obligations to make pension contributions
and to pay related premiums. However, there can be no assurance that future
changes in such laws or regulations, or interpretations thereof, changes in
OSG's business or in market conditions affecting the value of plan assets will
not require OSG to expend amounts that exceed those that are now anticipated.
EMPLOYEE HEALTH AND SAFETY REGULATION. The Company's operations are subject
to a variety of worker safety laws. OSHA and analogous laws mandate general
requirements for safe workplaces for all employees. The Company believes that
its operations are in material compliance with applicable employee health and
safety laws.
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STATE AND FEDERAL REGULATION. The Company's manufacturing and packaging of
over-the-counter pharmaceuticals, which accounts for a small percentage of
revenues, and cosmetics is subject to regulation by the FDA and by various state
agencies, especially the California Department of Health Services. Any failure
by the Company to remain in compliance with the regulations promulgated by these
agencies could have a material adverse effect on the Company's business.
The Company must also adhere to state and federal regulations governing
"good manufacturing practices," including testing, quality control,
manufacturing, inspection, and documentation requirements for certain products.
Although the Company has had no difficulty in complying with these regulations
to date, if violations of such regulations are noted during inspections of the
Company's manufacturing facilities, the Company may be required or may elect to
cease manufacturing and packaging at the facility in violation, pending
resolution of the violation. In these circumstances, the Company may also be
required or may elect to recall products that were manufactured under improper
conditions. Although the Company has had no difficulty in complying with these
regulations to date, there can be no assurance that any future federal or state
regulation of the Company's business will not have a material adverse impact on
the Company's business, results of operations or financial condition.
MINIMUM WAGES. The Company utilizes local labor contractors at its various
facilities to provide a significant portion of its production labor force. The
Company is subject to the Fair Labor Standards Act as well as various federal,
state and local regulations that govern such matters as minimum wage
requirements, overtime and working conditions. A large number of the Company's
employees, including those provided by local labor contractors, are paid at or
just above the federal minimum wage level and, accordingly, changes in laws,
regulations or ordinances could have a material adverse effect on the Company by
increasing the Company's costs.
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MANAGEMENT
Set forth below is certain biographical information relating to the
directors and executive officers of the Company, as of September 30, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---------------------------------------------------- --- --------------------------------------------------
<S> <C> <C>
Christopher Denney.................................. 53 Director, Chief Executive Officer, President
Dennis M. Nolan..................................... 53 Chief Operating Officer
John G. Hewson, Jr.................................. 47 Senior Vice President of Sales and Marketing
Joseph W. Sortais................................... 55 Chief Financial Officer, Treasurer, Secretary
Walter K. Lim....................................... 71 Director, Chairman
Samuel D. Garretson................................. 62 Director
Howard C. Lim....................................... 62 Director
John H. Morris...................................... 54 Director
Drew H. Adams....................................... 37 Director, Assistant Secretary
Frank Edelstein..................................... 72 Director
Robert M. Wadsworth................................. 38 Director
Joseph A. Marino.................................... 65 Director
</TABLE>
CHRISTOPHER DENNEY. Mr. Denney was appointed Chief Executive Officer and
director of OSG upon consummation of the Kolmar Acquisition. From January 1994
to December 1997, Mr. Denney was the President of Kolmar. From 1987 to 1994, Mr.
Denney worked at CCL in a variety of senior management positions, including
Managing Director and Chief Executive Officer of CCL's United Kingdom
subsidiary. Prior to joining CCL, Mr. Denney was Director of Marketing with
Consumer Packaging Industries, Inc. from 1982 to 1987. Mr. Denney is an active
member of the Cosmetics Toiletries and Fragrances Association ("CFTA") board of
directors. Mr. Denney holds a B.S. degree in Mechanical Engineering from
Lancaster and Morecambe Tech.
DENNIS M. NOLAN. Mr. Nolan joined the Company as its Chief Operating
Officer in January 1998. From 1990 to 1997, Mr. Nolan worked at CCL in a variety
of senior management positions, including Senior Vice President of Operations
where he was responsible for the management and direction of six North American
plants. Prior to joining CCL, Mr. Nolan held positions with Peterson/Puritan
Inc. (a contract manufacturer) and Gillette where, during his last eight years
he worked as Division Manager of Operations and Materials. Mr. Nolan holds a
B.A. degree in Economics from Boston College.
JOHN G. HEWSON, JR. Mr. Hewson was appointed Senior Vice President of Sales
and Marketing upon consummation of the Kolmar Acquisition. From December 1996 to
December 1997, Mr. Hewson served as the Chief Operating Officer of ASC. From
1986 to 1996, Mr. Hewson was with DowBrands L.P. (which was acquired by The
Lamaur Corporation in 1996) in a variety of senior management positions,
including Vice President--Manufacturing Services. Prior to that, Mr. Hewson
served as Corporate Director of Purchasing for Carter Hawley Hale, Inc. and was
the Assistant Director of Materials Management and International Purchasing
Manager for Richardson-Vicks Inc. Mr. Hewson holds a B.A. degree from Colgate
University and an M.B.A. from Rutgers University.
JOSEPH W. SORTAIS. Mr. Sortais was appointed Chief Financial Officer,
Treasurer and Secretary of OSG in June 1997. Mr. Sortais has been with the
Company since 1994, was appointed Chief Financial Officer of Piedmont on its
acquisition in September 1996, and was appointed Chief Financial Officer of
Kolmar upon consummation of the Kolmar Acquisition as of January 9, 1998. From
1984 to 1994, Mr. Sortais held senior management positions, most recently as
Chief Financial Officer, for the management buyout of Republic Supply from Fluor
Corporation and the subsequent successful management and resale of Republic
Supply. Mr. Sortais holds a B.S. degree in Accounting and an M.B.A. in Finance
from the University of California at Berkeley. He is also a Certified Management
Accountant (CMA) and a Certified Financial Planner (CFP).
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<PAGE>
WALTER K. LIM. Mr. Lim has been Chairman of the Board of Directors of the
Company since February 1994 and was the President of ASC from its founding in
1966 until December 1997. Prior to founding ASC, Mr. Lim was a partner in
Pacific Aerosols, Inc., a plant manager and chemist at National Aerosol Co.,
Inc., and chief chemist with Purepac Corporation. Mr. Lim serves on the Board of
Directors of the CSMA and is a member of the Society of Cosmetic Chemists, the
Beauty and Barber Supply Institute and the National Cosmetology Association,
Inc. Mr. Lim holds a B.S. degree in Chemistry from the University of California,
Los Angeles.
SAMUEL D. GARRETSON. Mr. Garretson has been a director of the Company since
June 1997 and was the President of Piedmont since its founding in 1985 until
December 1997. Prior to joining the Company, Mr. Garretson held a variety of
engineering and management positions with Kartridg--Pak, Puritan Aerosol
Company, and Western Filling Corporation. Mr. Garretson holds an E.E. degree
from Virginia Polytechnic Institute.
HOWARD C. LIM. Mr. Lim has been a director of the Company since February
1994 and was the Executive Vice President, Chief Financial Officer and Treasurer
of ASC from 1968 to 1997. Prior to joining the Company, Mr. Lim was Chief of
Laboratory Services for the Crenshaw Medical Center Hospital in Los Angeles. Mr.
Lim holds a B.S. degree in Medical Technology from the University of Southern
California and an M.B.A. in Management and Finance from Pepperdine University,
School of Business and Management.
JOHN H. MORRIS. Mr. Morris has been a director of the Company since
February 1994. He has been the President of G+MG since its founding in 1992,
where he was primarily responsible for the acquisition of ASC by the Company.
From 1981 to 1992, Mr. Morris worked with Kelso & Co. Prior thereto, he held
various positions with Booz, Allen & Hamilton and Touche Ross & Company. Mr.
Morris is currently a director of Arkansas Best Corp. and Treadco, Inc. He is a
Certified Public Accountant, a Certified Management Consultant, and is a member
of the American Institute of Certified Public Accountants (AICPA). He holds a
B.S. degree in Industrial Engineering from the Georgia Institute of Technology
and an M.B.A. (Finance) from Georgia State University.
DREW H. ADAMS. Mr. Adams has been a director of the Company since January
1998 and Assistant Secretary of the Company since consummation of the Kolmar
Acquisition. He has been employed with G+MG since 1993 where he is currently a
Partner. Mr. Adams was primarily responsible for the acquisitions of Piedmont
and Kolmar by the Company. From 1987 to 1993, Mr. Adams worked in Wells Fargo
Bank's Corporate Banking Group. Mr. Adams was a Vice President with Wells Fargo
when he joined G+MG in 1993. Mr. Adams holds a B.A. degree in Marketing and an
M.B.A. in finance from Texas Christian University.
FRANK EDELSTEIN. Mr. Edelstein has been a director of the Company since
February 1994. He has been employed as a Vice President of G+MG since March
1992. From 1987 to 1992, Mr. Edelstein was a Vice President with Kelso &
Company, Inc. Prior thereto, he held various positions with Continental
Corporation, Automatic Data Processing, Inc., Leisure Technology, Inc., Olivetti
Corp. of America, B. Manischewitz Corp. and Devegh & Co. Mr. Edelstein holds a
B.A. degree in Mathematics and Economics from New York University in 1948 and
completed Masters Studies in Mathematic Statistics & Business at Columbia
University in 1949. Mr. Edelstein is a director of Arkansas Best Corp.,
International House of Pancakes Corp. and Ceradyne.
ROBERT M. WADSWORTH. Mr. Wadsworth has been a director of the Company since
February 1994. He has been a Managing Director of HarbourVest and its
predecessor, HVP, since 1986. Prior thereto, he held various positions with
Booz, Allen & Hamilton. Mr. Wadsworth currently serves on the advisory boards of
several U.S. venture capital firms and on the board of directors of Coil S.A.
(Belgium), Concord Communications, Gulf States Steel, as well as numerous
private corporations. Mr. Wadsworth holds a B.S.
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<PAGE>
degree in Systems Engineering and Computer Science from the University of
Virginia and an M.B.A. from Harvard Business School.
JOSEPH A. MARINO. Mr. Marino has been a director of the Company since
February 1994. He was President and Chief Executive Officer of Western
Publishing Company from 1982 until his retirement in 1989. Prior thereto, Mr.
Marino was President of Liquid Paper Corporation, a subsidiary of Gillette, Vice
President-Marketing with Gillette's Safety Razor Division, and President of
Braun North America, a division of Gillette. Mr. Marino currently serves on the
Boards of Directors of Wickes Furniture, Inc. and Heritage Bank and Trust (which
changed its name to Johnson Bank), as well as several private companies. Mr.
Marino holds a B.S. in Business Administration from Tri-State University in
Indiana and an M.B.A. in Accounting from the Graduate School of Business at
Michigan State University.
Each of the directors listed above serves for a term of one year until the
next annual meeting of stockholders or until their respective successors are
duly elected and qualified. The Stockholders Agreement sets forth specific
procedures for the election of directors. See "Certain Relationships and Related
Transactions--Stockholder Agreement and Registration Rights Agreement."
Executive officers are elected annually and serve at the pleasure of the Board
of Directors. Walker K. Lim and Howard C. Lim are brothers.
DIRECTOR COMPENSATION
Directors are reimbursed for their out-of-pocket expenses incurred in
attending meetings of the Board of Directors of the Company and its
subsidiaries. Frank Edelstein and Joseph A. Marino receive an annual fee of
$35,000 for serving as directors on the Board of Directors of the Company.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company to its
Chief Executive Officer and the four other most highly compensated executive
officers (the "Named Executive Officers") for the fiscal year ended December 31,
1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($)(2)
- ------------------------------------------------------------- --------- ---------- ----------- -------------------
<S> <C> <C> <C> <C>
Walter K. Lim................................................ 1997 $ 369,763 $ -- $ 3,557
President
Howard C. Lim................................................ 1997 369,763 -- 2,008
Executive Vice President
Samuel D. Garretson.......................................... 1997 203,845 -- 6,684
President, Piedmont Laboratories
John G. Hewson............................................... 1997 155,790 51,802(1) --
Chief Operating Officer
Joseph W. Sortais............................................ 1997 111,068 22,734 --
Chief Financial Officer
</TABLE>
- ------------------------
(1) $11,802 represents a relocation bonus paid to Mr. Hewson.
(2) All Other Compensation consists of contributions made by ASC to its profit
sharing plan on behalf of Mr. Walter K. Lim in the amount of $1,301, Mr.
Howard C. Lim in the amount of $1,301, Mr. Sortais in the amount of $991 and
contributions by Piedmont to its 401(k) plan on behalf of Mr. Garretson in
the amount of $3,810. In addition All Other Compensation consists of
insurance premiums paid by
59
<PAGE>
ASC with respect to term life insurance in the amount of $2,256 for Mr.
Walter K. Lim and $702 for Mr. Howard C. Lim, and by Piedmont in the amount
of $6,684 for Mr. Garretson.
EMPLOYMENT AGREEMENTS
Howard C. Lim entered into an Amendment and Termination of Employment
Contract (the "Lim Termination Contract"), effective December 31, 1997, a copy
of which has been filed as an exhibit to the Registration Statement of which
this Prospectus constitutes a part, with ASC. Mr. Lim's employment terminated
with ASC upon the closing of the Kolmar Acquisition, however, Mr. Lim will
continue to serve as a member of the Board of Directors and will receive
payments after February 14, 1999 in the amount of $35,000 per year for such
service or such other amount as OSG pays outside directors for as long as he
continues to hold at least 33% of the shares of Common Stock held by him on
December 31, 1997. As severance, Mr. Lim will receive a lump sum payment of
$403,722 plus accrued but unused vacation and will continue to receive medical,
automobile and health insurance until February 14, 1999. Mr. Lim is restricted
from competing with the Company or ASC for a period of five years following
termination of employment and will not solicit customers or employees.
Samuel D. Garretson entered into an Amendment and Termination of Employment
Contract (the "Garretson Termination Contract"), effective December 31, 1997, a
copy of which has been filed as an exhibit to the Registration Statement of
which this Prospectus constitutes a part, with Piedmont. Mr. Garretson's
employment terminated with Piedmont upon the closing of the Kolmar Acquisition.
Mr. Garretson will no longer serve as Vice Chairman of the Board of Directors;
however, he will continue to serve as a member of the Board of Directors and
will receive payments after September 30, 1998, in the amount of $35,000 per
year or such other amount as OSG pays outside directors for as long as he
continues to hold at least 33% of the shares of Common Stock held by him on
December 31, 1997. As severance, Mr. Garretson will receive a lump sum payment
of $150,000 and will continue to receive automobile, life and health insurance
until September 30, 1998. In addition, Piedmont agreed not to exercise its call
rights with respect to Mr. Garretson's shares under the Stockholder Agreement
(as defined). Mr. Garretson is restricted from competing with the Company or
Piedmont for a period of five years following termination of employment and will
not solicit customers or employees.
Christopher Denney entered into an employment agreement (the "Employment
Agreement") with the Company, effective January 1, 1998, a copy of which has
been filed as an exhibit to the Registration Statement of which this Prospectus
constitutes a part, which has an initial term of three years and may be extended
by mutual agreement for additional years on the same or mutually agreeable
terms. Mr. Denney will serve as President and Chief Executive Officer of the
Company and of Kolmar. The Company will pay to Mr. Denney a base salary of
$250,000 per year and a performance bonus to be determined by the Company's
Board of Directors. Upon the effective time of the Employment Agreement, Mr.
Denney received options to purchase 85,000 shares of Common Stock at the price
of $10 per share pursuant to a stock option agreement. The options are
exercisable on the earlier of (i) December 31, 2000, (ii) the date on which the
Common Stock becomes publicly traded, (iii) the date on which the Company
completes an initial public offering of its Common Stock with proceeds in excess
of $15 million, and (iv) the date on which the Company (or its assets) is sold
substantially as an entirety. For each of December 31, 1998, 1999, 2000, 2001,
and 2002, Mr. Denney, along with other executives, will be eligible to
participate in a stock option program providing for an annual award, to all such
participants in the aggregate, of options to purchase up to 60,000 shares of
Company stock. If Mr. Denney resigns for good reason (as such term is defined in
the Employment Agreement) or dies or becomes disabled, the Company will pay Mr.
Denney or his representative his base salary through the balance of the term of
the Employment Agreement. During the employment term and continuing for a period
of two years after the date of the expiration of Mr. Denney's employment (unless
Mr. Denney is terminated by the Company without cause), Mr. Denney will not
solicit customers or employees of the Company.
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<PAGE>
Messrs. Hewson and Sortais (the "Executives") have entered into employment
agreements with the Company, effective February 1, 1998, which have a term of
three years and may be extended by mutual agreement for additional years on the
same or mutually agreeable terms. Copies of such employment agreements have been
filed as exhibits to the Registration Statement of which this Prospectus
constitutes a part. Mr. Sortais will serve as Senior Vice President and Chief
Financial Officer of the Company and Mr. Hewson will serve as Senior Vice
President--Sales and Marketing of the Company. The Company will pay to Mr.
Hewson a base salary of $200,000 per year and a performance bonus to be
determined by the Company's board of directors. The Company will pay to Mr.
Sortais a base salary of $150,000 per year and a performance bonus to be
determined by the Company's board of directors. Upon the effective time of the
agreements, each of the Executives was eligible to receive an option to purchase
twenty thousand shares of the Company's common stock at the price of $10 per
share. The option is exercisable on the earlier of (i) January 31, 2001, (ii)
the Company's common stock becoming publicly traded, (iii) the Company
completing an initial public offering of its common stock with proceeds in
excess of $15,000,000, or (iv) the Company (or its assets) is sold substantially
as an entirety. For each of the five years after January 1, 1998, the
Executives, along with other executives, will be eligible to participate in a
stock option program providing for an annual award, to all such participants in
the aggregate, of options to purchase up to 60,000 shares of Company stock. If
either Executive resigns for good reason (as such term is defined in the
employment agreement), the Company will pay such Executive his base salary and
benefits through the balance of the term. If either Executive dies or becomes
disabled, the Company will pay such Executive his base salary and benefits
through the balance of the term of the agreement. During the employment term and
continuing for a period of two years after the date of the expiration of each
Executive's employment (unless the Executive is terminated by the Company
without cause), the Executive will not solicit or take away any customer or
employee of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Joseph A. Marino, Howard C. Lim and Robert M. Wadsworth served on the
Compensation Committee during 1997. Mr. Lim also served as Executive Vice
President of the Company during 1997.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of June 27, 1998 (i) by each person known by
the Company to own beneficially more than 5% of the outstanding shares of Common
Stock, (ii) by each director and Named Executive Officer and (iii) by all
directors and executive officers of the Company as a group (except as otherwise
listed below, the address of each person listed is c/o Outsourcing Services
Group, Inc., 425 South Ninth Avenue, City of Industry, CA 91746).
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
---------------------
NAME NUMBER PERCENT
- -------------------------------------------------------------------------------------------- ---------- ---------
<S> <C> <C>
Gordon+Morris Investment Partnership, L.P.(1) .............................................. 1,279,970 37.2%
840 Newport Center Drive, Suite 600
Newport Beach, CA 92660
HarbourVest Partners IV-Direct Fund L.P. (2) ............................................... 343,916 10.0%
One Financial Center, 44th Floor
Boston, MA 02111
HarbourVest Partners V-Direct Fund L.P.(3) ................................................. 1,100,000 32.0%
One Financial Center, 44th Floor
Boston, MA
Christopher Denney(4) ...................................................................... -- --
John G. Hewson.............................................................................. -- --
Joseph W. Sortais(5)........................................................................ * *
Walter K. Lim(6)............................................................................ 222,974 6.5%
Samuel D. Garretson......................................................................... 101,187 2.9%
Howard C. Lim............................................................................... 185,609 5.4%
Frank Edelstein(7).......................................................................... -- --
Drew H. Adams(8)............................................................................ 1,279,970 37.2%
Joseph A. Marino(9)......................................................................... -- --
John H. Morris(1)(10)....................................................................... 1,355,618 39.4%
Robert M. Wadsworth(11)..................................................................... 1,443,916 41.9%
Michael S. Gordon(1)(12).................................................................... 1,355,618 39.4%
Bruce N. Lipian(1)(13)...................................................................... 1,355,618 39.4%
All directors and Named Executive Officers as a group (11 persons).......................... 3,314,599 96.3%
</TABLE>
* Less than 1%
- ------------------------
(1) Gordon+Morris Partners, L.P. ("GMP") is the general partner and a limited
partner of GMIP. Michael S. Gordon, John H. Morris and Bruce N. Lipian are
the general partners of GMP.
(2) Investment and dispositive power of shares of Common Stock held by HVP-IV
is held by HarbourVest. HVP-IV is a limited partner of GMIP but does not
exercise voting or investment power over the shares of Common Stock held by
GMIP.
(3) Investment and dispositive power of HVP-V is held by HarbourVest.
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<PAGE>
(4) Does not include 85,000 shares subject to options granted to Mr. Denney,
which options will be fully vested on December 31, 2000 or the occurence of
certain other events. See "Management-- Employment Agreements."
(5) Joseph W. Sortais is the trustee of the Sortais Trust dated May 27, 1994,
which is a limited partner of GMIP. Mr. Sortais does not exercise voting or
investment power over the shares of Common Stock held by GMIP.
(6) Walter K. Lim is a co-trustee of the Walter K. Lim and Sylvia Lim Revocable
Trust dated November 30, 1989, which is a limited partner of GMIP. Mr. Lim
does not exercise voting or investment power over the shares of Common
Stock held by GMIP.
(7) Frank Edelstein is the trustee of the Edelstein Living Trust which is a
limited partner of ASC Investment Partners, L.P. ("ASCIP"), which owns
75,648 shares of Common Stock. See "Certain Relationships and Related
Transactions--ASC Investment Partners, L.P." Mr. Edelstein does not
exercise voting or investment power over the shares of Common Stock held by
ASCIP.
(8) Drew H. Adams is a limited partner of ASCIP, which owns 75,648 shares of
Common Stock, and a general partner of GMP. As such, Mr. Adams executes
voting and investment power over the shares of Common Stock owned by GMIP.
See "Certain Relationships and Related Transactions--ASC Investment
Partners, L.P." Mr. Adams does not exercise voting or investment power over
the shares of Common Stock held by ASCIP.
(9) Joseph A. Marino is a limited partner of both GMIP and ASCIP, which owns
75,648 shares of Common Stock. See "Certain Relationships and Related
Transactions--ASC Investment Partners, L.P." Mr. Marino does not exercise
voting or investment power over the shares of Common Stock held by either
GMIP or ASCIP.
(10) John H. Morris is a shareholder, officer and director of the general
partner of ASCIP and a general partner of GMP, the general partner of GMIP.
As such, Mr. Morris exercises voting and investment power over the shares
of Common Stock owned by ASCIP and GMIP. Mr. Morris is a trustee of the
John H. Morris and Sharon L. Morris Family Trust, which is a limited
partner in ASCIP, which owns 75,648 shares of Common Stock. See "Certain
Relationships and Related Transactions--ASC Investment Partners, L.P."
(11) Robert M. Wadsworth is a managing director of HVP and HarbourVest which
control the general partners of HVP-IV and HVP-V, respectively. As such,
Mr. Wadworth exercises voting and investment power over the shares of
Common Stock held by HVP-IV and HVP-V.
(12) Michael S. Gordon is a shareholder, officer and director of the general
partner of ASCIP and a general partner of GMP, the general partner of GMIP.
As such, Mr. Gordon exercises voting and investment power over the shares
of Common Stock owned by ASCIP and GMIP. Mr. Gordon is a trustee of the
Mikel Gordon Trust dated January 29, 1988 which is a limited partner in
ASCIP, which owns 75,648 shares of Common Stock. See "Certain Relationships
and Related Transactions--ASC Investment Partners, L.P."
(13) Bruce N. Lipian is a shareholder, officer and director of the general
partner of ASCIP and a general partner of GMP, the general partner of GMIP.
As such, Mr. Lipian exercises voting and investment power over the shares
of Common Stock owned by ASCIP and GMIP. ASCIP owns 75,648 shares of Common
Stock. See "Certain Relationships and Related Transactions--ASC Investment
Partners, L.P."
63
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCKHOLDER AGREEMENT AND REGISTRATION RIGHTS AGREEMENT
In connection with the Merger, each stockholder of the Company at that time
executed an amended and restated stockholder agreement, dated June 30, 1997 (the
"Original Stockholder Agreement"), a copy of which has been filed as an exhibit
to the Registration Statement of which this Prospectus constitutes a part,
setting forth the rights, obligations and restrictions by and among the Company
and its stockholders. In contemplation of the Kolmar Acquisition, on December
31, 1997, the Original Stockholder Agreement was amended by an amendment to
stockholder agreement (the "Amendment"), a copy of which has been filed as an
exhibit to the Registration Statement of which this Prospectus constitutes a
part. The Original Stockholder Agreement and the Amendment are referred to
herein as the "Stockholder Agreement." The rights, obligations and restrictions
set forth in the Stockholder Agreement include, but are not limited to, the
following: (a) restrictions on sales, pledges and other transfers of Common
Stock by the Company's stockholders (the "Stockholders") except in certain
circumstances; (b) the right of certain individuals who are part of management
of the Company to sell their shares of Common Stock to the Company upon
termination of employment by the Company without cause or upon the death or
disability, retirement or resignation for "good reason" (as defined therein) of
such person; (c) the right of the Company to purchase shares of Common Stock of
certain Stockholders in certain circumstances; (d) restrictions on the purchase
of shares of Common Stock by the Company in certain circumstances; (e) a right
of first refusal in favor of the Company and the Stockholders in certain
circumstances; and (f) the right to compel a sale or merger of the Company. The
obligation of the Company to purchase shares of Common Stock of certain
management employees pursuant to clause (b) above may be deferred in certain
circumstances, including to the extent that the Company is prohibited by any
debt instruments entered into by the Company or any of its affiliates or by law.
In the event such payment is deferred, it shall accrue interest at a rate of 9%
per annum until paid in full.
The Stockholder Agreement requires that, unless certain events have
occurred, each Stockholder will nominate, elect and vote all of such
Stockholder's shares of Common Stock to continue in office a Board of Directors
consisting of nine members, three of whom will be designated by the Founders
(Samuel D. Garretson, Walter K. Lim and Howard C. Lim) and must be reasonably
acceptable to GMIP; two of whom will be designated by HarbourVest; three of whom
will be designated by GMIP; and one of whom will be Christopher Denney, so long
as he is Chief Executive Officer of the Company and is willing to serve. The
persons designated by the Founders, HarbourVest and GMIP may be changed from
time to time by the Founders, HarbourVest and GMIP, respectively, provided,
however, that Walter K. Lim, Howard C. Lim and Samuel D. Garretson will each be
one of the directors named by the Founders so as long as he holds at least
thirty-three percent (33%) of the Common Stock he held on December 31, 1997 and
is willing to serve. If both Michael S. Gordon and John H. Morris are no longer
principals of the manager of GMIP, then HarbourVest will have the right to name
one of the directors GMIP would otherwise have the right to name, provided that
HarbourVest is, at such time, the beneficial owner of at least ten percent (10%)
of the Common Stock. If either GMIP and its affiliates or HarbourVest and its
affiliates no longer hold at least 33% of the highest number of shares of Common
Stock held by them at any time, the rights of GMIP or HarbourVest, as
appropriate, to name a director will terminate. On each date that any one of
Walter K. Lim, Howard C. Lim and Samuel D. Garretson ceases to own at least 33%
of the Common Stock he held on December 31, 1997, the number of directors to be
named by the Founders will decrease by one, and when all three of such Founders
cease to own at least 33% of the Common Stock that each held on December 31,
1997, the Founders shall no longer have the right to name any directors. If
Christopher Denney ceases to be a director because he is no longer Chief
Executive Officer, Mr. Denney's directorship will be filled by the incoming
Chief Executive Officer.
Certain parties to the Original Stockholder Agreement previously entered
into a registration rights agreement with the Company on February 14, 1994
providing certain piggyback registration rights relating to their shares of
Common Stock.
64
<PAGE>
PRIVATE PLACEMENTS OF COMMON STOCK
In connection with financing the Kolmar Acquisition, the Company sold
2,093,000 shares of Common Stock for an aggregate purchase price of $20.9
million to GMIP, Walter K. Lim and HVP-V. On September 30, 1996, ACHC, the sole
stockholder of Piedmont, issued 700,000 shares of Common Stock to certain
existing stockholders of the Company, including Walter K. Lim, Howard C. Lim,
GMIP and HarbourVest, as well as certain other new investors, at a purchase
price of $10.00 per share in connection with the Piedmont acquisition. On June
30, 1997, all issued and outstanding ACHC and ASHC shares were exchanged for
1,267,174 shares of Common Stock in the Company as a result of the Merger.
Pursuant to the Merger, 3,750 shares of the Company's unclassified preferred
stock owned by Nancy Lim were exchanged for the Company's Series A Preferred
Stock (as defined) and 26,250 shares of the Company's unclassified preferred
stock owned by Walter K. Lim and Howard C. Lim were exchanged for the Company's
Series B Preferred Stock (as defined). In each case, such transactions,
including the conversion ratios, were approved by a majority of the independent
directors of the Company. See "Description of Acquisition Agreements."
MANAGEMENT SERVICE AGREEMENTS
The Company, ASC, Piedmont, Kolmar and G+MG are parties to an Amended and
Restated Management Services Agreement, dated January 8, 1998 (the "Management
Services Agreement"), a copy of which has been filed as an exhibit to the
Registration Statement of which this Prospectus constitutes a part, which
supersedes all prior management agreements with G+MG. Pursuant to this
agreement, G+MG agreed to provide financial advisory, consulting and other
management services to the Company. The Company paid G+MG a fee of $800,000 upon
the closing of the Kolmar Acquisition and will pay G+MG (i) provided certain
conditions are met, an annual fee of $350,000 which is subject to adjustment in
the event of further acquisitions and/or dispositions, (ii) provided certain
ownership conditions are met at the closing of each acquisition of an additional
business an amount equal to 1% (or a different amount agreed to by the parties
up to 2%) of the total consideration paid to third parties, including assumption
of debt, (iii) provided certain ownership conditions are met, upon the sale of
the Company or any of its subsidiaries, an amount equal to 1% (or a different
amount agreed to by the parties up to 2%) of the consideration received,
including the assumption of debt, (iv) at the closing of a debt refinancing
transaction an amount equal to 0.5% (or a different amount agreed to by the
parties up to 1%) of the amount refinanced and (v) reasonable out-of-pocket
expenses. This agreement contains broad indemnification provisions benefitting
G+MG. Since January 1, 1994, the Company has paid G+MG a total of approximately
$1.9 million (up to but not including the fee for the Kolmar Acquisition) under
the Management Services Agreement and predecessor agreements. The Management
Services Agreement was approved by a majority of the independent directors of
the Company.
The Company is also party to a letter agreement with HarbourVest, dated
January 8, 1998 (the "HarbourVest Agreement"), a copy of which has been filed as
an exhibit to the Registration Statement of which this Prospectus constitutes a
part, whereby HarbourVest has agreed to provide a representative to serve on the
Company's Board of Directors and to render financial and business advice to OSG.
In return, the Company will (i) reimburse the HarbourVest designated OSG
director for all reasonable expenses related to attending meetings, (ii)
provided certain ownership conditions are met, pay HarbourVest a $115,000 annual
financial advisory fee, $50,000 of which shall be paid in cash and the remainder
of which shall accrue, all subject to increase if the management fees paid to
G+MG are increased and (iii) pay HarbourVest a fee of 1/3 of the fee received by
G+MG or any of its affiliates under the Management Services Agreement upon the
sale of OSG or any of its subsidiaries or, if approved by OSG's Board of
Directors, upon the acquisition of additional businesses. The HarbourVest
Agreement was approved by a majority of the independent directors of the
Company.
65
<PAGE>
ASC INVESTMENT PARTNERS, L.P.
ASCIP was formed on February 3, 1994 as a Delaware limited partnership
pursuant to an Agreement of Limited Partnership which was amended on March 27,
1996. ASCIP acquired 100,000 shares of ASHC's common stock in ASHC's acquisition
of ASC, which shares were exchanged for 75,648 shares of Common Stock in the
Merger; both transactions were on the same terms as those terms for other
stockholders. John H. Morris and Michael S. Gordon, directors of the Company,
and Bruce N. Lipian, are shareholders, officers and directors of ASCIP's general
partner and indirectly exercise voting and investment power over the shares held
by ASCIP. Each of Joseph A. Marino, Drew H. Adams and Frank Edelstein, directors
of the Company, or their affiliates, are limited partners of ASCIP and do not
exercise voting and investment power over the shares held by ASCIP.
PURCHASES FROM THE LIMS
The Company leases its manufacturing and warehouse facilities located in the
City of Industry, as well as certain equipment located therein, from Walter K.
Lim, Sylvia Lim, Howard C. Lim, Nancy Lim, and their affiliates. The Company
believes these leases were entered into in the ordinary course of business on
terms no less favorable than could be obtained from a third party in an
arms-length transaction and were approved by the Board of Directors of the
Company. Between January 1, 1995, and June 27, 1998, the Company paid
approximately $3.6 million to Walter K. Lim, Sylvia Lim, Howard C. Lim, Nancy
Lim, and their affiliates, under all such leases.
The Company has sold products to companies controlled by Walter K. Lim,
Howard C. Lim, and their affiliates, in the amount of $100,000 and $119,000 and
$227,000 for the years ended December 31, 1995, 1996 and 1997, respectively. The
Company believes that these sales were made in the ordinary course of business
on terms no less favorable than could have been obtained from a third party in
an arms-length transaction.
AMENDMENT TO CERTIFICATE OF INCORPORATION
In accordance with the Kolmar Acquisition, the Company's Certificate of
Incorporation was amended with respect to the Preferred Stock (as defined) in
order to extend the redemption date of the Preferred Stock until after the
maturity of the Notes.
MANAGEMENT PRIVATE PLACEMENT
On September 10, 1998, the Company sold, by way of a private placement,
95,000 shares of its Common Stock to certain of its and its subsidiaries'
managers, including two of the Named Executive Officers, Mr. Hewson and Mr.
Sortais, and Mr. Denney and Mr. Nolan at a purchase price of $10.00 per share.
In most cases, the Company financed up to 80% (except for Mr. Nolan, for whom
the Company financed 100%) of the aggregate purchase price of each manager's
subscription. In each such case, the respective manager executed a promissory
note and pledged all of his or her shares to the Company to secure his or her
obligation under the promissory note. The Common Stock sold to management was
not registered under the Securities Act. Mr. Sortais purchased less than $60,000
worth of Common Stock, 80% of which purchase was financed by the Company. Mr.
Denney, Mr. Hewson and Mr. Nolan purchased 20,000, 10,000 and 10,000, shares of
Common Stock, respectively, and the Company loaned to these individuals
$160,000, $80,000 and $100,000, respectively, to finance the purchase of such
stock. Indebtedness under the promissory notes (i) bears interest at the rate of
8.0% per annum, payable on the first business day of each month commencing
September 1, 1998 and (ii) is due in full upon the earlier to occur of (a) the
date on which the borrowers' shares of Common Stock are repurchased by the
Company and (b) December 31, 2002.
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DESCRIPTION OF CERTAIN TERMS OF THE PREFERRED STOCK
AND THE WARRANT AGREEMENT
PREFERRED STOCK
The following is a description of the general terms of the Preferred Stock
of the Company. This information relating to the Preferred Stock is qualified in
its entirety by reference to the Certificate of Amendment of Certificate of
Incorporation of OSG, dated January 8, 1998, a copy of which has been filed as
an exhibit to the Registration Statement of which this Prospectus constitutes a
part. This document is available upon request from the Company.
The Company has issued and outstanding 30,000 shares of Preferred Stock
("Preferred Stock"), 3,750 shares of which are designated as "Series A Preferred
Stock," par value of $.001 per share and 26,250 shares of which are designated
as "Series B Preferred Stock," par value $.001 per share. Neither class of
Preferred Stock has voting rights, except as provided by law. Holders of Series
A Preferred Stock are entitled to a noncumulative dividend ("Series A Current
Dividend") in cash equal to $2.50 per share per quarter. If the Series A Current
Dividend is not declared and paid, then the Series A Preferred Stock holders are
entitled to a cumulative dividend ("Series A Deferred Dividends") in cash equal
to $3.25 per share for the quarter preceding the dividend payment date, subject
to quarterly increases of 2.5% of such dividend or, if Series A Current
Dividends and all Series A Deferred Dividends are not timely paid, 3.25% of such
dividend. Holders of Series B Preferred Stock are entitled to receive cumulative
dividends ("Series B Dividends") in cash equal to $2.00 per share per quarter.
Series B Dividends accrue whether or not they have been declared. At any time
after the completion of an offering by the Company of its shares of Common Stock
pursuant to an effective registration statement filed with the Securities and
Exchange Commission or at any time after June 30, 2000, the Company may, at the
option of its Board of Directors, redeem all or part of the outstanding shares
of Preferred Stock or a series thereof at a redemption price of $100.00 per
share of Series A Preferred Stock, plus all accrued and unpaid dividends thereon
through the date of redemption (the "Series A Redemption Price"), and $145.97
per share of Series B Preferred Stock, plus all accrued and unpaid dividends
thereon through the date of redemption (the "Series B Redemption Price"). The
Company must redeem all outstanding Preferred Stock upon the earlier of (i) a
liquidation, dissolution or winding up of the Company, (ii) an initial public
offering of Common Stock which results in net proceeds of not less than $20.0
million to the Company and (iii) June 30, 2010. Upon a change of control (as
defined therein) at the option of the holders of a majority of the Preferred
Stock, the Company shall redeem all outstanding shares of Series A Preferred
Stock at the Series A Redemption Price and all outstanding shares of Series B
Preferred Stock at the Series B Redemption Price. As of June 27, 1998, dividends
on the Series A Preferred Stock had accrued in the amount of $18,800, but $9,400
remain unpaid, and dividends on the Series B Preferred Stock had accrued in the
amount of $105,000, but remain unpaid.
WARRANT AGREEMENT
The following is a description of the general terms of the Warrant Agreement
(as defined). This information relating to the Warrant Agreement is qualified in
its entirety by reference to the Warrant Agreement. This document is available
upon request from the Company.
In connection with the issuance of $6 million of the Company's 12% senior
subordinated notes to Chase Manhattan Capital, L.P. or its transferee ("Chase
Manhattan") on June 30, 1997 (which notes were refinanced as part of the Kolmar
Acquisition), the Company entered into a warrant agreement with Chase Manhattan.
Pursuant to this warrant agreement, Chase Manhattan received a warrant to
purchase 80,833 shares of Common Stock at an exercise price of $.01 per share
(the "Warrant"). In contemplation of the Offering, the Company and Chase
Manhattan entered into an Amended and Restated Warrant Agreement (the "Warrant
Agreement"), dated as of January 8, 1998, a copy of which has been filed as an
exhibit to the Registration Statement of which this Prospectus constitutes a
part, which supersedes the prior warrant agreement.
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Under the Warrant Agreement, Chase Manhattan retained the Warrant, which is
exercisable immediately and expires on June 30, 2007. The Warrant Agreement
provides for certain anti-dilution rights and restrictions on transferability in
addition to certain registration, tag along, drag along and preemptive rights.
Pursuant to the Warrant Agreement, if the Company purchases or redeems any
shares of its Common Stock from affiliates of the Company, Chase Manhattan shall
have the right to cause the Company to purchase the Warrant or shares of Common
Stock owned by Chase Manhattan that were acquired pursuant to exercise of the
Warrant ("Warrant Stock") on the same terms, subject to certain quantity and
other restrictions. In addition, at any time or from time to time after June 30,
2002, but prior to the earlier of (i) an initial public offering of the Common
Stock pursuant to an effective registration statement under the Securities Act
with proceeds of at least $10.0 million before the payment of underwriting
discounts and commissions (an "IPO") and (ii) June 30, 2007, Chase Manhattan
shall have the right to require the Company to purchase all or any portion of
the Warrant and Warrant Stock at the fair market value of the Common Stock on
the date the right is exercised ("Purchase Price"). If the Company is prohibited
from purchasing all Warrant and Warrant Stock pursuant to Chase Manhattan's
request because of insufficient funds or contractual restrictions, the Purchase
Price with respect to such unpurchased Warrant or Warrant Stock will become an
accruing liability of the Company with interest accruing thereon at 12.5% per
annum, compounded quarterly (the "Accruing Liability"). The Accruing Liability
shall be subordinated in right of payment to the prior payment in full of all
Senior Debt of the Company (as defined in the Warrant Agreement). At any time or
from time to time after June 30, 2003, but prior to the earlier of (i) an IPO
and (ii) June 30, 2007, the Company shall have the right to purchase all (but
not less than all) of the Warrant and Warrant Stock at the fair market value of
the Common Stock on that date.
Without the prior consent of Chase Manhattan, the Warrant Agreement
prohibits (i) the Company and its subsidiaries from repurchasing or redeeming
shares of Common Stock, except for shares repurchased or redeemed from
management, other than on a PRO RATA basis from all of the Company's
shareholders and Chase Manhattan; (ii) the Company and its subsidiaries from
selling, leasing or otherwise transferring any property or assets to, or
purchasing, leasing or otherwise acquiring any property or assets from, or
otherwise engaging in any other transactions with, any of the Company's
affiliates, except (a) in the ordinary course, (b) transactions between or among
the Company and its wholly-owned subsidiaries, (c) any transactions existing as
of January 8, 1998 or (d) other transactions permitted by the Warrant Agreement;
(iii) the Company from entering into any agreement or instrument limiting in any
manner its ability to perform its obligations under the Warrant Agreement or the
Warrants, other than the Subordinated Bridge Facility and the Senior Secured
Credit Facility and any refinancing thereof (including the Notes); and (iv) the
Company from amending any provisions of the Company's employee stock option
plan, Stockholder Agreement and organizational documents in any manner that
would have an adverse effect on Chase Manhattan's rights under the Warrant,
without the prior consent of Chase Manhattan.
DESCRIPTION OF ACQUISITION AGREEMENTS
ASC ACQUISITION AGREEMENT
ASHC (subsequently renamed OSG), a holding corporation formed for such
purpose, acquired on February 14, 1994, through a merger, Aerosol Services
Company, Inc. (predecessor to ASC) from Walker K. Lim and Howard C. Lim (the
"Lims") for $32.0 million in cash and $3.0 million of preferred stock in ASHC
pursuant to that certain purchase and merger agreement (the "ASC Acquisition
Agreement"), dated as of February 14, 1994, a copy of which has been filed as an
exhibit to the Registration Statement of which this Prospectus constitutes a
part. Pursuant to the ASC Acquisition Agreement, Aerosol Services Company, Inc.
(predecessor to ASC) was merged into a newly-formed subsidiary of ASHC. The
newly-formed subsidiary of ASHC survived the merger and was renamed ASC.
Pursuant to the ASC Acquisition Agreement, the Lims are required, subject to a
$0.4 million minimum threshold, to indemnify ASC and OSG for losses resulting
from inaccuracies or breaches of representations and warranties, including
losses resulting from undisclosed hazardous materials and other environmental
liabilities, and for breaches of post-closing covenants. The
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Lims' liability to the Company for indemnification is limited to $3.0 million
except for indemnifiable losses incurred with respect to the representations and
warranties relating to title, employee benefits, employment laws, environmental
laws and taxes, for which liability is unlimited and there is no $0.4 million
minimum threshold. In connection with the ASC Acquisition Agreement, the Lims
executed amendments to their leases with ASC to provide an offset against lease
payments as a means of satisfying environmental indemnities under the ASC
Acquisition Agreement.
PIEDMONT ACQUISITION AGREEMENT
ACHC, a holding company formed for such purpose, acquired on September 30,
1996, all of the shares of Piedmont from Samuel D. Garretson and certain other
sellers (collectively, the "Sellers") for a combination of cash and the
refinancing of debt totaling $14.1 million pursuant to that certain stock
purchase agreement, dated as of June 27, 1996 (the "Piedmont Acquisition
Agreement"), a copy of which has been filed as an exhibit to the Registration
Statement of which this Prospectus constitutes a part. Pursuant to the Piedmont
Acquisition Agreement, the Sellers agreed to indemnify ACHC, subject to a
$325,000 minimum threshold in most cases, for losses resulting from inaccuracies
or breaches of representations and warranties, including losses resulting from
undisclosed hazardous materials and other environmental liabilities, and for
breaches of post-closing covenants. The Sellers' liability for indemnification
under the Piedmont Acquisition Agreement is limited to $1.0 million.
KOLMAR ACQUISITION AGREEMENT
As of January 1, 1998, OSG acquired all of the shares of Kolmar from CCL
Industries and certain assets relating to Kolmar's Canadian operations from CCL
for an aggregate purchase price of $78.0 million, subject to certain
post-closing adjustments, pursuant to a share and asset purchase agreement dated
October 28, 1997, as it was amended by that certain letter agreement dated
January 1, 1998 and by that certain modification agreement dated January 8, 1998
(collectively the "Kolmar Acquisition Agreement"), a copy of which has been
filed as an exhibit to the Registration Statement of which this Prospectus
constitutes a part. Upon consummation of the Kolmar Acquisition, Kolmar became a
wholly-owned subsidiary of OSG and those other assets purchased from CCL were
transferred to Kolmar Canada Inc., an Ontario corporation formed for such
purpose, which became a wholly-owned subsidiary of Kolmar. Pursuant to the
Kolmar Acquisition Agreement and subject to a $134,000 minimum threshold in one
lawsuit, CCL retained liability for all disclosed litigation. The Kolmar
Acquisition Agreement contains typical representations and warranties, which for
the most part shall survive until the earlier of (i) July 8, 1999 or (ii)
delivery of Kolmar's audited financial statements for the year ending December
31, 1998. Certain representations and warranties made with respect to compliance
with environmental laws survive until January 8, 2003. CCL and CCL Industries
agreed to indemnify the Company for losses resulting from inaccuracies or
breaches of representations and warranties and breaches of certain covenants
contained in the agreement. Subject to a $750,000 minimum threshold and for
certain environmental liabilities subject to a $250,000 minimum threshold, CCL
and CCL Industries' liability for indemnification is limited to $6.5 million
(this limit is $12.0 million with respect to losses resulting from environmental
matters related to certain facilities and there is no limit with respect to
losses from environmental matters related to certain other facilities). Pursuant
to the terms of the Kolmar Acquisition Agreement, OSG is required to indemnify
CCL and CCL Industries for losses resulting from breaches or inaccuracies of its
representations and warranties and for losses arising from the Company's conduct
of Kolmar's business, its real property and environmental matters, to the extent
that the losses relate to actions or occurrences after the closing date.
DESCRIPTION OF THE SENIOR SECURED CREDIT FACILITY
The Company is a party to a credit agreement (the "Senior Secured Credit
Facility"), dated as of January 8, 1998, among ASC, a copy of which has been
filed as an exhibit to the Registration Statement of which this Prospectus
constitutes a part, Piedmont and Kolmar, as the initial borrowers, and any other
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subsidiary of the Company which becomes a borrower thereunder (collectively, the
"Borrowers"), the Company, as guarantor, the financial institutions from time to
time a party thereto (the "Lenders"), BT Commercial Corporation ("BTCC"), as
agent, and Heller Financial, Inc., as co-agent, pursuant to which the Lenders
have agreed to make revolving loans and letters of credit available to the
Borrowers to finance working capital, other permitted corporate purposes and
permitted acquisitions (the "Revolving Credit Facility"). The amount available
to individual Borrowers is limited by a formula as set forth in the Senior
Secured Credit Facility based on that Borrower's accounts receivable, inventory,
equipment and real property with the maximum aggregate amount available to all
Borrowers capped at $70.0 million. This information relating to the Senior
Secured Credit Facility is qualified in its entirety by reference to the
complete text of the Senior Secured Credit Facility and the other documents
entered into in connection therewith. The following is a description of the
general terms of the Senior Secured Credit Facility which is available upon
request from the Company.
Indebtedness of the Borrowers under the Senior Secured Credit Facility is
guaranteed by the Company and, with respect solely to Kolmar Laboratories, Inc.
by Kolmar Canada Inc. ("Kolmar Canada"), and will be guaranteed by future
domestic subsidiaries of the Company and future subsidiaries of the Company
designated as "Subsidiary Guarantors" pursuant to the Senior Secured Credit
Facility. Such indebtedness is secured by, or will be secured by, (i) the
assets, including accounts receivable, inventory, equipment, certain real
property, intellectual property and intercompany indebtedness of each Borrower,
the Company and Kolmar Canada, (ii) a pledge of all of the stock of each
domestic subsidiary of the Company, (iii) a pledge of 66% of the stock of each
foreign subsidiary of the Company and (iv) a pledge by each foreign subsidiary
of the Company of intercompany notes.
At the option of the Borrowers, indebtedness under the Senior Secured Credit
Facility bears interest at a floating rate based on (i) the Prime Lending Rate
(defined as the rate which BTCo announces as its prime lending rate from time to
time), plus 0.75% (the "Base Rate Margin") or (ii) the Eurodollar Rate (defined
as the rate of the offered quotation, if any, to first class banks in the
Eurodollar market by BTCo for U.S. dollar deposits) for one, two, three or six
months, in each case plus 2.25% (the "Eurodollar Rate Margin"). The Base Rate
Margin and Eurodollar Rate Margin are subject to adjustment pursuant to the
terms of the Senior Secured Credit Facility. The Borrowers shall pay to the
Lenders an unused line fee equal to 0.375% per annum of the average daily
unutilized portion of the Revolving Credit Facility, payable monthly, in
accordance with the provisions of the Senior Secured Credit Facility. The
Borrowers shall also pay to the Lenders letter of credit fees as set forth in
the Senior Secured Credit Facility.
Loans made under the Revolving Credit Facility may be repaid and reborrowed.
The Revolving Credit Facility matures on December 31, 2002, subject to earlier
termination pursuant to the terms of the Senior Secured Credit Facility.
Mandatory prepayments of the Revolving Credit Facility shall be made from all
net proceeds from the Offering in excess of amounts used to repay the
Subordinated Bridge Facility and from all insurance proceeds received upon the
loss or destruction of the Company's assets or properties.
The Senior Secured Credit Facility provides that the Company and its
subsidiaries must meet certain financial tests, including minimum EBITDA,
minimum fixed charge coverage ratios and maximum funded debt ratios. The Senior
Secured Credit Facility also contains covenants which, among other things, limit
the incurrence of additional indebtedness and contingent obligations,
investments, dividends, transactions with affiliates, asset sales, acquisitions,
mergers and consolidations, prepayments of other indebtedness, the creation of
liens and encumbrances, capital expenditures and other matters customarily
restricted in such agreements.
The Senior Secured Credit Facility contains customary events of default,
including payment defaults, breach of representations and warranties, covenant
defaults, cross-defaults to certain other indebtedness, certain events of
bankruptcy and insolvency, judgment defaults, certain changes of control of the
Company, its subsidiaries and certain affiliates and the cessation of the
enforceability of the Senior Secured Credit Facility or any other document
executed in connection therewith or the security interests granted thereby.
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DESCRIPTION OF NOTES
The New Notes will be issued under the indenture (the "Indenture"), dated as
of March 3, 1998, by and among the Company, the Guarantors and U.S. Bank Trust
National Association (formerly First Trust National Association), as Trustee,
(the "Trustee"), a copy of which has been filed as an exhibit to the
Registration Statement of which this Prospectus constitutes a part. The New
Notes are identical in all material respects to the terms of the Old Notes
except (i) that the New Notes have been registered under the Securities Act,
(ii) for certain transfer restrictions and registration rights relating to the
Old Notes and (iii) that the New Notes will not contain certain provisions
relating to Liquidated Damages to be paid to the Holders of Old Notes under
certain circumstances relating to the timing of the Exchange Offer and to other
registration requirements described below under "--Exchange Offer; Registration
Rights." The Trustee will authenticate and deliver New Notes for original issue
only in exchange for a like principal amount of Old Notes. Any Old Notes that
remain outstanding after the consummation of the Exchange Offer, together with
the New Notes, will be treated as a single class of securities under the
Indenture.
The following summary of certain provisions of the Indenture does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, the Trust Indenture Act of 1939, as amended (the "TIA"), and to
all of the provisions of the Indenture, including the definitions of certain
terms therein and those terms made a part of the Indenture by reference to the
TIA as in effect on the date of the Indenture. A copy of the Indenture may be
obtained from the Company or BT. The definitions of certain capitalized terms
used in the following summary are set forth below under "--Certain Definitions."
For purposes of this section, references to the "Company" include only the
Company and not its Subsidiaries.
The Notes will be unsecured obligations of the Company, ranking subordinate
in right of payment to all Senior Debt of the Company.
The New Notes will be, and the Old Notes are, issued in fully registered
form only, without coupons, in denominations of $1,000 and integral multiples
thereof. Initially, the Trustee will act as paying agent and registrar for the
Notes. The Notes may be presented for registration or transfer and exchange at
the offices of the Registrar, which initially will be the Trustee's corporate
trust office. The Company may change any paying agent and registrar without
notice to holders of the Notes (the "Holders"). The Company will pay principal
(and premium, if any) on the Notes at the Trustee's corporate office in New
York, New York. At the Company's option, interest may be paid at the Trustee's
corporate trust office or by check mailed to the registered address of Holders.
For purposes of this section, references to the "Notes" include the Old Notes
and the New Notes, unless the context otherwise requires.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $130,000,000, of
which $105,000,000 will be issued in the Offering, and will mature on March 1,
2006. Additional amounts may be issued in one or more series from time to time
subject to the limitations set forth under "--Certain Covenants--Limitation on
Incurrence of Additional Indebtedness" and restrictions contained in the Credit
Agreement. Interest on the Notes will accrue at the rate of 10 7/8% per annum
and will be payable semiannually in arrears and in cash on each March 1 and
September 1, commencing on September 1, 1998, to the persons who are registered
Holders at the close of business on the February 15 and August 15, respectively,
immediately preceding the applicable interest payment date. Interest on the
Notes will accrue from the most recent date to which interest has been paid or,
if no interest has been paid, from and including the date of issuance. Interest
will be computed on the basis of a 360-day year of twelve 30-day months.
Registered holders of New Notes on the relevant record date for the first
interest payment date following the consummation of the Exchange Offer will
receive interest accruing from the most recent date to which interest has been
paid or, if no interest has been paid, from March 3, 1998. Old Notes accepted
for exchange will cease to accrue interest from and after the date of
consummation of the Exchange Offer. Holders whose Old Notes are accepted for
exchange will not receive any payment in respect of interest on
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such Old Notes otherwise payable on any interest payment date the record date
for which occurs on or after the consummation of the Exchange Offer.
The Notes will not be entitled to the benefit of any mandatory sinking fund.
REDEMPTION
OPTIONAL REDEMPTION. The Notes will be redeemable, at the Company's option,
in whole at any time or in part from time to time, on and after March 1, 2003,
upon not less than 30 nor more than 60 days' notice, at the following redemption
prices (expressed as percentages of the principal amount thereof) if redeemed
during the twelve-month period commencing on March 1 of the year set forth
below, plus, in each case, accrued and unpaid interest thereon, if any, to the
date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- --------------------------------------------------------------------------------- -----------
<S> <C>
2003............................................................................. 105.438%
2004............................................................................. 103.625%
2005 and thereafter.............................................................. 101.813%
</TABLE>
OPTIONAL REDEMPTION UPON EQUITY OFFERINGS. At any time, or from time to
time, on or prior to March 1, 2001, the Company may, at its option, use the net
cash proceeds of one or more Equity Offerings to redeem up to 35% of the
aggregate principal amount of Notes originally issued at a redemption price
equal to 110.875% of the principal amount thereof plus accrued and unpaid
interest thereon, if any, to the date of redemption; PROVIDED that at least 65%
of the principal amount of New Notes issued hereunder together with the Old
Notes originally issued and not exchanged in the Exchange Offer remains
outstanding immediately after any such redemption. In order to effect the
foregoing redemption with the proceeds of any Equity Offering, the Company shall
make such redemption not more than 120 days after the consummation of any such
Equity Offering.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any time,
selection of such Notes for redemption will be made by the Trustee in compliance
with the requirements of the principal national securities exchange, if any, on
which such Notes are listed or, if such Notes are not then listed on a national
securities exchange, on a PRO RATA basis, by lot or by such method as the
Trustee shall deem fair and appropriate; PROVIDED, HOWEVER, that no Notes of a
principal amount of $1,000 or less shall be redeemed in part; PROVIDED, FURTHER,
that if a partial redemption is made with the proceeds of an Equity Offering,
selection of the Notes or portions thereof for redemption shall be made by the
Trustee only on a PRO RATA basis or on as nearly a PRO RATA basis as is
practicable (subject to The Depository Trust Company's procedures, if
applicable), unless such method is otherwise prohibited. Notice of redemption
shall be mailed by first-class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in a principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
will cease to accrue on Notes or portions thereof called for redemption as long
as the Company has deposited with the paying agent funds in satisfaction of the
applicable redemption price pursuant to the Indenture.
SUBORDINATION
The payment of all Obligations on the Notes is subordinated in right of
payment to the prior payment in full in cash or Cash Equivalents of all
Obligations on Senior Debt. Upon any payment or distribution of assets of the
Company of any kind or character, whether in cash, property or securities, to
creditors upon
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any liquidation, dissolution, winding up, reorganization, assignment for the
benefit of creditors or marshaling of assets of the Company or in a bankruptcy,
reorganization, insolvency, receivership or other similar proceeding relating to
the Company or its property, whether voluntary or involuntary, all Obligations
due or to become due upon all Senior Debt shall first be paid in full in cash or
Cash Equivalents, or such payment duly provided for to the satisfaction of the
holders of Senior Debt, before any payment or distribution of any kind or
character is made on account of any Obligations on the Notes, or for the
acquisition of any of the Notes for cash or property or otherwise. If any
default occurs and is continuing in the payment when due, whether at maturity,
upon any redemption, by declaration or otherwise, of any principal of, interest
on, unpaid drawings for letters of credit issued in respect of, or regularly
accruing fees with respect to, any Senior Debt (a "Payment Default"), no payment
of any kind or character shall be made by or on behalf of the Company or any
other Person on its behalf with respect to any Obligations on the Notes or to
acquire any of the Notes for cash or property or otherwise unless and until such
default has been cured, waived or has ceased to exist or such Senior Debt shall
have been discharged or paid in full in cash, or in any other manner acceptable
to the holders of such Senior Debt.
In addition, if any event of default other than a Payment Default (a
"Non-payment Default") occurs and is continuing with respect to any Designated
Senior Debt, as such event of default is defined in the instrument creating or
evidencing such Designated Senior Debt, permitting the holders of such
Designated Senior Debt then outstanding to accelerate the maturity thereof and
if the Representative for the respective issue of Designated Senior Debt gives
written notice of the Non-payment Default to the Trustee (a "Default Notice"),
then, unless and until all Non-payment Defaults have been cured or waived or
have ceased to exist or the Trustee receives notice from the Representative for
the respective issue of Designated Senior Debt terminating the Blockage Period
(as defined below), during the 180 days after the delivery of such Default
Notice (the "Blockage Period"), neither the Company nor any other Person on its
behalf shall (x) make any payment of any kind or character with respect to any
Obligations on the Notes or (y) acquire any of the Notes for cash or property or
otherwise. Notwithstanding anything herein to the contrary, in no event will a
Blockage Period extend beyond 180 days from the date the payment on the Notes
was due and only one such Blockage Period may be commenced within any 360
consecutive days. No Non-payment Default which existed or was continuing on the
date of the commencement of any Blockage Period with respect to the Designated
Senior Debt shall be, or be made, the basis for commencement of a second
Blockage Period by the Representative of such Designated Senior Debt whether or
not within a period of 360 consecutive days, unless such Non-payment Default
shall have been cured or waived for a period of not less than 90 consecutive
days (it being acknowledged that any subsequent action or any breach of any
financial covenants for a period commencing after the date of commencement of
such Blockage Period that, in either case, would give rise to a Non-payment
Default pursuant to any provisions under which a Non-payment Default previously
existed or was continuing shall constitute a new Non-payment Default for this
purpose).
By reason of such subordination, in the event of the insolvency of the
Company, creditors of the Company who are not holders of Senior Debt, including
the Holders of the Notes, may recover less, ratably, than holders of Senior
Debt.
As of June 27, 1998, the Company had no Senior Debt Outstanding.
HOLDING COMPANY
The Company is a holding company for its Subsidiaries, with no material
operations of its own and only limited assets. Accordingly, the Company is
dependent upon the distribution of the earnings of its Restricted Subsidiaries,
whether in the form of dividends, advances or payments on account of
intercompany obligations, to service its debt obligations. There can be no
assurance that, after providing for all prior claims, there would be sufficient
assets available from the Company and the Guarantors to satisfy the claims of
the Holders of Notes. See "Risk Factors--Holding Company Structure; Effects of
Asset Encumbrance."
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GUARANTEES
Each Guarantor unconditionally guarantees, on a full, unconditional, joint
and several and unsecured senior subordinated basis, jointly and severally, to
each Holder and the Trustee, the full and prompt performance of the Company's
obligations under the Indenture and the Notes, including the payment of
principal of and interest on the Notes. The Guarantees will be subordinated to
Guarantor Senior Debt on the same basis as the Notes are subordinated to Senior
Debt. As of June 27, 1998, the Guarantors had no Guarantor Senior Debt and the
Guarantors had approximately $52.1 million of availability under the Senior
Secured Credit Facility. Each Guarantor and each Holder irrevocably agrees
pursuant to the Indenture that the obligations of each Guarantor under its
Guarantee will not exceed the maximum that such Guarantor could incur without
such obligations constituting an avoidable fraudulent transfer or conveyance
under such laws, taking into account (if necessary), among other things, all
other debts of such Guarantor (including, without limitation, any contingent or
unliquidated debts and such Guarantor's Guarantor Senior Debt) at the time that
such Guarantor entered into its Guarantee or became obligated to make any
payment thereunder, as appropriate. Each Guarantor that makes a payment under a
Guarantee shall be entitled to receive from each other Guarantor a reimbursement
amount as set forth in the Indenture.
Each Guarantor may consolidate with or merge into or sell its assets to the
Company or another Guarantor that is a Restricted Subsidiary of the Company
without limitation, or with other Persons upon the terms and conditions set
forth in the Indenture. See "--Certain Covenants--Merger, Consolidation and Sale
of Assets." In the event all of the Capital Stock of a Guarantor is sold by the
Company and the sale complies with the provisions set forth in "--Certain
Covenants--Limitation on Asset Sales," the Guarantor's Guarantee will be
released. Each Guarantor that is designated as an Unrestricted Subsidiary in
accordance with the Indenture shall be released from its Guarantee and related
obligations set forth in the Indenture for so long as it remains an Unrestricted
Subsidiary.
CHANGE OF CONTROL
The Indenture will provide that upon the occurrence of a Change of Control,
each Holder will have the right to require that the Company purchase all or a
portion of such Holder's Notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the principal
amount thereof plus accrued interest to the date of purchase.
Within 30 days following the date upon which the Change of Control occurred,
the Company must send, by first class mail, a notice to each Holder, with a copy
to the Trustee, which notice shall govern the terms of the Change of Control
Offer. Such notice shall state, among other things, the purchase date for the
Notes, which must be no earlier than 30 days nor later than 45 days from the
date such notice is mailed, other than as may be required by law (the "Change of
Control Payment Date"). Holders electing to have a Note purchased pursuant to a
Change of Control Offer will be required to surrender the Note, with the form
entitled "Option of Holder to Elect Purchase" on the reverse of the Note
completed, to the paying agent at the address specified in the notice prior to
the close of business on the third business day prior to the Change of Control
Payment Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the purchase price for all
the Notes that might be delivered by Holders seeking to accept the Change of
Control Offer. In the event the Company is required to purchase outstanding
Notes pursuant to a Change of Control Offer, the Company expects that it would
seek third party financing to the extent it does not have available funds to
meet its purchase obligations. However, there can be no assurance that the
Company would be able to obtain such financing.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a Holder's right to redemption upon a Change of Control
without the consent of the Holders of a majority in principal amount of the then
outstanding Notes. Restrictions in the Indenture described herein on the
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ability of the Company and its Restricted Subsidiaries to incur additional
Indebtedness, to grant liens on its property, to make Restricted Payments and to
make Asset Sales may also make more difficult or discourage a takeover of the
Company, whether favored or opposed by the management of the Company.
Consummation of any such transaction in certain circumstances may require
redemption or repurchase of the Notes, and there can be no assurance that the
Company or the acquiring party will have sufficient financial resources to
effect such redemption or repurchase. Such restrictions and the restrictions on
transactions with Affiliates may, in certain circumstances, make more difficult
or discourage any leveraged buyout of the Company or any of its Subsidiaries by
the management of the Company. While such restrictions cover a wide variety of
arrangements which have traditionally been used to effect highly leveraged
transactions, the Indenture may not afford the Holders of Notes protection in
all circumstances from the adverse aspects of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction.
The Credit Agreement prohibits the Company from purchasing any Notes and
also provides that certain change of control events (including a Change of
Control) with respect to the Company would constitute a default thereunder. Any
future credit agreements or other agreements relating to Senior Debt to which
the Company becomes a party may contain similar restrictions and provisions. In
the event a Change of Control occurs at a time when the Company is prohibited
from purchasing Notes, the Company could seek the consent of its lenders to
purchase the Notes or could attempt to refinance the borrowings that contain
such prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Notes. In such
case, the Company's failure to purchase tendered Notes would constitute an Event
of Default under the Indenture, which would, in turn, constitute a default under
the Credit Agreement. In such circumstances, the subordination provisions in the
Indenture would likely restrict payments to the Holders of Notes.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants:
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS. The Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible for
payment of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); PROVIDED, HOWEVER, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company or any of its Restricted
Subsidiaries may incur Indebtedness (including, without limitation, Acquired
Indebtedness) if on the date of the incurrence of such Indebtedness, after
giving effect to the incurrence thereof, the Consolidated Fixed Charge Coverage
Ratio of the Company is greater than 2.0 to 1.0 if the Indebtedness is incurred
prior to March 1, 2000 and greater than 2.25 to 1.0 if the Indebtedness is
incurred thereafter.
LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not cause
or permit any of its Restricted Subsidiaries to, directly or indirectly, (a)
declare or pay any dividend or make any distribution (other than dividends or
distributions payable in Qualified Capital Stock of the Company) on or in
respect of shares of the Company's Capital Stock to holders of such Capital
Stock, (b) purchase, redeem or otherwise acquire or retire for value any Capital
Stock of the Company or any warrants, rights or options
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to purchase or acquire shares of any class of such Capital Stock, (c) make any
principal payment on, purchase, defease, redeem, prepay or otherwise acquire or
retire for value, prior to any scheduled final maturity, scheduled repayment or
scheduled sinking fund payment, any Indebtedness of the Company that is
subordinate or junior in right of payment to the Notes or (d) make any
Investment (other than Permitted Investments) (each of the foregoing actions set
forth in clauses (a), (b), (c) and (d) being referred to as a "Restricted
Payment"), if at the time of such Restricted Payment or immediately after giving
effect thereto, (i) a Default or an Event of Default shall have occurred and be
continuing or (ii) the Company is not able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant or (iii) the
aggregate amount of Restricted Payments (including such proposed Restricted
Payment) made subsequent to the Issue Date (the amount expended for such
purposes, if other than in cash, being the fair market value of such property as
determined reasonably and in good faith by the Board of Directors of the
Company) shall exceed the sum of: (w) 50% of the cumulative Consolidated Net
Income (or if cumulative Consolidated Net Income shall be a loss, minus 100% of
such loss) of the Company earned subsequent to the Issue Date and through the
last day of the fiscal quarter ending prior to the date the Restricted Payment
occurs (the "Reference Date") (treating such period as a single accounting
period); plus (x) 100% of the aggregate net cash proceeds received by the
Company from any Person (other than a Subsidiary of the Company) from the
issuance and sale subsequent to the Issue Date and on or prior to the Reference
Date of Qualified Capital Stock of the Company, including the net cash proceeds
received by the Company upon the exercise, exchange or conversion of
Indebtedness or Disqualified Capital Stock into Qualified Capital Stock; plus
(y) to the extent not otherwise included in Consolidated Net Income of the
Company, an amount equal to the net reduction in Investments (other than
reductions in Permitted Indebtedness) in Unrestricted Subsidiaries resulting
from dividends, interest payments, repayments of loans or advances, or other
transfers of cash, in each case, to the Company or to any Wholly-Owned
Restricted Subsidiary of the Company from Unrestricted Subsidiaries, or from
redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (in each
case valued as provided in the definition of "Investment"), not to exceed, in
the case of an Unrestricted Subsidiary, the amount of Investments previously
made by the Company or any Restricted Subsidiary of the Company in such
Unrestricted Subsidiary and which were treated as a Restricted Payment under the
Indenture; plus (z) without duplication of any amounts included in clause
(iii)(x) above, 100% of the aggregate net cash proceeds of any equity
contribution received by the Company from a holder of the Company's Capital
Stock (excluding, in the case of clauses (iii)(x) and (z), any net cash proceeds
from an Equity Offering to the extent used to redeem the Notes).
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (1) the payment of any dividend within 60
days after the date of declaration of such dividend if the dividend would have
been permitted on the date of declaration; (2) if no Default or Event of Default
shall have occurred and be continuing, the acquisition, redemption, repurchase
or retirement of any shares of Capital Stock of the Company, either (i) solely
in exchange for shares of Qualified Capital Stock of the Company or (ii) through
the application of net proceeds of a substantially concurrent sale for cash
(other than to a Subsidiary of the Company) of shares of Qualified Capital Stock
of the Company; (3) if no Default or Event of Default shall have occurred and be
continuing, the acquisition of any Indebtedness of the Company that is
subordinate or junior in right of payment to the Notes either (i) solely in
exchange for shares of Qualified Capital Stock of the Company, or (ii) through
the application of net proceeds of a substantially concurrent sale for cash
(other than to a Subsidiary of the Company) of (A) shares of Qualified Capital
Stock of the Company or (B) Refinancing Indebtedness; (4) so long as no Default
or Event of Default shall have occurred and be continuing, repurchases by the
Company of Common Stock of the Company from employees, officers or directors of
the Company or any of its Subsidiaries or their authorized representatives upon
the death, disability or termination of employment of such officers, directors
and employees, in an aggregate amount not to exceed $1,000,000 in any calendar
year and $5,000,000 in the aggregate, in each case plus the aggregate cash
proceeds from any reissuance during such calendar year of Common Stock by the
Company to employees, officers or directors of the Company and
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its Subsidiaries plus the aggregate cash proceeds from any payments on life
insurance policies in which the Company or its Subsidiaries is the beneficiary
with respect to any employees, officers or directors of the Company and its
Subsidiaries which proceeds are used to purchase the Common Stock of the Company
held by any such employees, officers or directors; (5) if no Default or Event of
Default shall have occurred and be continuing, the redemption at stated maturity
of the existing Class A Preferred Stock of Nancy Lim and the payment of
scheduled dividend payments thereon in accordance with the terms of such Class A
Preferred Stock; (6) if no Default or Event of Default shall have occurred and
be continuing, the repurchase by the Company of the warrants issued in
connection with the Warrant Agreement upon the exercise of the put rights
contained in such Warrant Agreement by the holders of such warrants; and (7)
repurchases of Capital Stock deemed to occur upon the exercise of stock options
if such Capital Stock represents a portion of the exercise price thereof. In
determining the aggregate amount of Restricted Payments made subsequent to the
Issue Date in accordance with clause (iii) of the immediately preceding
paragraph, amounts expended pursuant to clauses (1), (2)(ii), (3)(ii)(A), (4),
(5), (6) and, to the extent included in clause (iii)(x) or (z) of the preceding
paragraph, (7) shall be included in such calculation.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an officers' certificate stating that such Restricted
Payment complies with the Indenture and setting forth in reasonable detail the
basis upon which the required calculations were computed, which calculations may
be based upon the Company's latest available internal quarterly financial
statements.
LIMITATION ON ASSET SALES. The Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company
or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors), (ii) at least 75% of the consideration
received by the Company or the Restricted Subsidiary, as the case may be, from
such Asset Sale shall be in the form of cash or Cash Equivalents and is received
at the time of such disposition (the fair market value of Replacement Assets (as
defined below) received by the Company or any Restricted Subsidiary, as the case
may be, from such Asset Sale shall be considered cash or Cash Equivalents for
purposes of this covenant); and (iii) upon the consummation of an Asset Sale,
the Company shall apply, or cause such Restricted Subsidiary to apply, the Net
Cash Proceeds relating to such Asset Sale within 270 days of receipt thereof
either (A) to prepay any Senior Debt and, in the case of any Senior Debt under
any revolving credit facility, effect a permanent reduction in the availability
under such revolving credit facility, (B) to make an investment in properties
and assets that replace the properties and assets that were the subject of such
Asset Sale or in properties and assets that will be used in the business of the
Company and its Subsidiaries as existing on the Issue Date or in any businesses
which are similar or related to the contract packaging and manufacturing
businesses ("Replacement Assets"), or (C) a combination of prepayment and
investment permitted by the foregoing clauses (iii)(A) and (iii)(B). On the
271st day after an Asset Sale or such earlier date, if any, as the Board of
Directors of the Company or of such Restricted Subsidiary determines not to
apply the Net Cash Proceeds relating to such Asset Sale as set forth in clauses
(iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each, a "Net
Proceeds Offer Trigger Date"), an amount equal to such aggregate amount of Net
Cash Proceeds which have not been applied on or before such Net Proceeds Offer
Trigger Date as permitted in clauses (iii)(A), (iii)(B) and (iii)(C) of the next
preceding sentence (each a "Net Proceeds Offer Amount") shall be applied by the
Company or such Restricted Subsidiary to make an offer to purchase (the "Net
Proceeds Offer") on a date (the "Net Proceeds Offer Payment Date") within 45
days following the applicable Net Proceeds Offer Trigger Date, from all Holders
on a PRO RATA basis, that amount of Notes equal to the Net Proceeds Offer Amount
at a price equal to 100% of the principal amount of the Notes to be purchased,
plus accrued and unpaid interest thereon, if any, to the date of purchase;
PROVIDED, HOWEVER, that if at any time any consideration other than Cash or Cash
Equivalents received by the Company or any Restricted Subsidiary of the Company,
as the case may be, in connection with any Asset Sale is converted into or sold
or otherwise disposed of for cash (other than interest received with respect to
any such non-cash consideration), then such conversion or disposition shall be
deemed to constitute an Asset Sale hereunder and the
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Net Cash Proceeds thereof shall be applied in accordance with this covenant. A
transfer of assets by the Company to a Wholly-Owned Restricted Subsidiary or by
a Restricted Subsidiary to the Company or to another Wholly-Owned Restricted
Subsidiary will not be deemed to be an Asset Sale. The Company may defer the Net
Proceeds Offer until there is an aggregate unutilized Net Proceeds Offer Amount
equal to or in excess of $5,000,000 resulting from one or more Asset Sales (at
which time, the entire unutilized Net Proceeds Offer Amount, and not just the
amount in excess of $5,000,000, shall be applied as required pursuant to this
paragraph).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "--Merger, Consolidation
and Sale of Assets," the successor corporation shall be deemed to have sold the
properties and assets of the Company and its Restricted Subsidiaries not so
transferred for purposes of this covenant, and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale.
In addition, the fair market value of such properties and assets of the Company
or its Restricted Subsidiaries deemed to be sold pursuant to this paragraph less
the fair market value of all liabilities of such Person related to such property
and assets not transferred shall be deemed to be Net Cash Proceeds for purposes
of this covenant.
Each Net Proceeds Offer will be mailed to the record Holders as determined
on a date shown on the register of Holders within 25 days following the Net
Proceeds Offer Trigger Date, with a copy to the Trustee, and shall comply with
the procedures set forth in the Indenture. Upon receiving notice of the Net
Proceeds Offer, Holders may elect to tender their Notes in whole or in part in
integral multiples of $1,000 in exchange for cash. To the extent Holders
properly tender Notes in an amount exceeding the Net Proceeds Offer Amount,
Notes of tendering Holders will be purchased on a PRO RATA basis (based on
amounts tendered), unless otherwise required by law or any applicable exchange
rules. A Net Proceeds Offer shall remain open for a period of 20 business days
or such longer period as may be required by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations or any applicable exchange
regulations conflict with the "Asset Sale" provisions of the Indenture, the
Company shall comply with the applicable securities laws and regulations and
exchange regulations and shall not be deemed to have breached its obligations
under the "Asset Sale" provisions of the Indenture by virtue thereof. The
agreements governing certain outstanding Senior Debt of the Company may require
that the Company and its Subsidiaries apply all proceeds from asset sales to
repay in full outstanding obligations under such Senior Debt prior to the
application of such proceeds to repurchase outstanding Notes.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES. The Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or permit to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary of the Company to (a) pay dividends or
make any other distributions on or in respect of its Capital Stock; (b) make
loans or advances or to pay any Indebtedness or other obligation owed to the
Company or any other Restricted Subsidiary of the Company; or (c) transfer any
of its property or assets to the Company or any other Restricted Subsidiary of
the Company, except for such encumbrances or restrictions existing under or by
reason of: (1) applicable law; (2) the Indenture, the Notes and the Guarantees;
(3) customary non-assignment provisions of any contract or any lease governing a
leasehold interest of any Restricted Subsidiary of the Company; (4) any
instrument governing Acquired Indebtedness, which encumbrance or restriction is
not applicable to any Person, or the properties or assets of any Person, other
than the Person or the properties or assets of the Person so acquired; (5)
agreements existing
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on the Issue Date (including the Credit Agreement) to the extent and in the
manner such agreements are in effect on the Issue Date; (6) any restriction or
encumbrance contained in contracts for sale of assets permitted by the Indenture
in respect of the assets being sold pursuant to such contracts pending the close
of such sale, which encumbrance or restriction is not applicable to any asset
other than the asset being sold pursuant to such contract; (7) Purchase Money
Obligations for property acquired in the ordinary course of business that impose
restrictions of the nature described in clause (c) above on the property so
acquired; (8) restrictions of the nature described in (c) above on the transfer
of assets subject to any Lien permitted under the Indenture imposed by the
holder of such Lien; or (9) an agreement governing Indebtedness incurred to
Refinance the Indebtedness issued, assumed or incurred pursuant to an agreement
referred to in clause (2), (4) or (5) above; PROVIDED, HOWEVER, that the
provisions relating to such encumbrance or restriction contained in any such
Indebtedness are no less favorable to the Company in any material respect as
determined by the Board of Directors of the Company in their reasonable and good
faith judgment than the provisions relating to such encumbrance or restriction
contained in agreements referred to in such clause (2), (4) or (5).
LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES. The Company will
not permit any of its Restricted Subsidiaries to issue any Preferred Stock
(other than to the Company or to a Wholly-Owned Restricted Subsidiary of the
Company) or permit any Person (other than the Company or a Wholly-Owned
Restricted Subsidiary of the Company) to own any Preferred Stock of any
Restricted Subsidiary of the Company unless at the time of such issuance such
Restricted Subsidiary would be entitled to create, incur or assume Indebtedness
pursuant to the covenant described under "--Limitation on Incurrence of
Additional Indebtedness" in the aggregate amount equal to the aggregate
liquidation value, plus any accrued and unpaid dividends, of the Preferred Stock
to be issued. Notwithstanding the foregoing, nothing contained in such covenant
will prohibit the ownership of Preferred Stock issued by a Person prior to the
time (a) such Person becomes a Restricted Subsidiary of the Company, (b) such
Person merges with or into a Restricted Subsidiary of the Company or (c) a
Subsidiary of the Company merges with or into such Person; PROVIDED that such
Preferred Stock was not issued by such Person in anticipation of a transaction
contemplated by any of clauses (a), (b) or (c) above.
LIMITATION ON LIENS. The Company will not, and will not cause or permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or permit or suffer to exist any Liens of any kind against or upon any property
or assets of the Company or any of its Restricted Subsidiaries whether owned on
the Issue Date or acquired after the Issue Date, or any proceeds therefrom, or
assign or otherwise convey any right to receive income or profits therefrom
unless (i) in the case of Liens securing Indebtedness that is expressly
subordinate or junior in right of payment to the Notes or any Guarantee, the
Notes and such Guarantee, as the case may be, are secured by a Lien on such
property, assets or proceeds that is senior in priority to such Liens and (ii)
in all other cases, the Notes and the Guarantees are equally and ratably
secured, except for (A) Liens existing as of the Issue Date to the extent and in
the manner such Liens are in effect on the Issue Date; (B) Liens securing Senior
Debt and Liens securing Guarantor Senior Debt; (C) Liens securing the Notes and
the Guarantees; (D) Liens of the Company or a Wholly-Owned Restricted Subsidiary
of the Company on assets of any Subsidiary of the Company; (E) Liens securing
Refinancing Indebtedness which is incurred to Refinance any Indebtedness which
has been secured by a Lien permitted under the Indenture and which has been
incurred in accordance with the provisions of the Indenture; PROVIDED, HOWEVER,
that such Liens (A) are no less favorable to the Holders and are not more
favorable to the lienholders with respect to such Liens than the Liens in
respect of the Indebtedness being Refinanced and (B) do not extend to or cover
any property or assets of the Company or any of its Restricted Subsidiaries not
securing the Indebtedness so Refinanced; and (F) Permitted Liens.
PROHIBITION ON INCURRENCE OF SENIOR SUBORDINATED DEBT. The Company will
not, and will not permit any Guarantor to, incur or suffer to exist Indebtedness
that is senior in right of payment to the Notes or any Guarantee, as the case
may be, and subordinate in right of payment to any other Indebtedness of the
Company or such Guarantor, as the case may be.
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MERGER, CONSOLIDATION AND SALE OF ASSETS. The Company will not, in a single
transaction or series of related transactions, consolidate or merge with or into
any Person, or sell, assign, transfer, lease, convey or otherwise dispose of (or
cause or permit any Restricted Subsidiary of the Company to sell, assign,
transfer, lease, convey or otherwise dispose of) all or substantially all of the
Company's assets (determined on a consolidated basis for the Company and the
Company's Restricted Subsidiaries) whether as an entirety or substantially as an
entirety to any Person unless: (i) either (1) the Company shall be the surviving
or continuing corporation or (2) the Person (if other than the Company) formed
by such consolidation or into which the Company is merged or the Person which
acquires by sale, assignment, transfer, lease, conveyance or other disposition
the properties and assets of the Company and of the Company's Restricted
Subsidiaries substantially as an entirety (the "Surviving Entity") (x) shall be
a corporation organized and validly existing under the laws of the United States
or any State thereof or the District of Columbia and (y) shall expressly assume,
by supplemental indenture (in form and substance satisfactory to the Trustee),
executed and delivered to the Trustee, the due and punctual payment of the
principal of, and premium, if any, and interest on all of the Notes and the
performance of every covenant of the Notes, the Indenture and the Registration
Rights Agreement on the part of the Company to be performed or observed; (ii)
immediately after giving effect to such transaction and the assumption
contemplated by clause (i)(2)(y) above (including giving effect to any
Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction), the Company or such
Surviving Entity, as the case may be, (1) shall have a Consolidated Net Worth
equal to or greater than 90% of the Consolidated Net Worth of the Company
immediately prior to such transaction and (2) shall be able to incur at least
$1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to
the "Limitation on Incurrence of Additional Indebtedness" covenant; (iii)
immediately before and immediately after giving effect to such transaction and
the assumption contemplated by clause (i)(2)(y) above (including, without
limitation, giving effect to any Indebtedness and Acquired Indebtedness incurred
or anticipated to be incurred and any Lien granted in connection with or in
respect of the transaction), no Default or Event of Default shall have occurred
and be continuing; and (iv) the Company or the Surviving Entity shall have
delivered to the Trustee an officers' certificate and an opinion of counsel,
each stating that such consolidation, merger, sale, assignment, transfer, lease,
conveyance or other disposition, and if a supplemental indenture is required in
connection with such transaction, such supplemental indenture, comply with the
applicable provisions of the Indenture and that all conditions precedent in the
Indenture relating to such transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company, the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
The Indenture will provide that upon any consolidation, combination or
merger or any transfer of all or substantially all of the assets of the Company
in accordance with the foregoing, in which the Company is not the continuing
corporation, the Surviving Entity formed by such consolidation or into which the
Company is merged or to which such conveyance, lease or transfer is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture and the Notes with the same effect as if such
surviving entity had been named as such.
Each Guarantor (other than any Guarantor whose Guarantee is to be released
in accordance with the terms of the Guarantee and the Indenture in connection
with any transaction complying with the provisions of "--Limitation on Asset
Sales") will not, and the Company will not cause or permit any Guarantor to,
consolidate with or merge with or into any Person other than the Company or any
other Guarantor unless: (i) the entity formed by or surviving any such
consolidation or merger (if other than the Guarantor) or to which such sale,
lease, conveyance or other disposition shall have been made is a corporation
organized and existing under the laws of the United States or any State thereof
or the District
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of Columbia; (ii) such entity assumes by supplemental indenture all of the
obligations of the Guarantor on the Guarantee; and (iii) immediately after
giving effect to such transaction, no Default or Event of Default shall have
occurred and be continuing. Any merger or consolidation of a Guarantor with and
into the Company (with the Company being the Surviving Entity) or another
Guarantor that is a Wholly-Owned Restricted Subsidiary of the Company need only
comply with clause (iv) of the first paragraph of this covenant.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. (a) The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into or permit to exist any transaction or series of related transactions
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with, or for the benefit of, any of
its Affiliates (each an "Affiliate Transaction"), other than (x) Affiliate
Transactions permitted under paragraph (b) below and (y) Affiliate Transactions
on terms that are not less favorable than those that might reasonably have been
obtained in a comparable transaction at such time on an arm's-length basis from
a Person that is not an Affiliate of the Company or such Restricted Subsidiary.
All Affiliate Transactions (and each series of related Affiliate Transactions
which are similar or part of a common plan) involving aggregate payments or
other property with a fair market value in excess of $500,000 shall be approved
by the Board of Directors of the Company or such Restricted Subsidiary, as the
case may be, such approval to be evidenced by a Board Resolution stating that
such Board of Directors has determined that such transaction complies with the
foregoing provisions. If the Company or any Restricted Subsidiary of the Company
enters into an Affiliate Transaction (or a series of related Affiliate
Transactions related to a common plan) that involves an aggregate fair market
value of more than $5,000,000, the Company or such Restricted Subsidiary, as the
case may be, shall, prior to the consummation thereof, obtain a favorable
opinion as to the fairness of such transaction or series of related transactions
to the Company or the relevant Restricted Subsidiary, as the case may be, from a
financial point of view, from an Independent Financial Advisor and file the same
with the Trustee.
(b) The restrictions set forth in paragraph (a) shall not apply to (i)
reasonable fees and compensation paid to and indemnity provided on behalf of,
officers, directors or employees, agents or consultants of the Company or any
Restricted Subsidiary of the Company as determined in good faith by the
Company's Board of Directors or senior management; (ii) transactions exclusively
between or among the Company and any of its Wholly-Owned Restricted Subsidiaries
or exclusively between or among such Wholly-Owned Restricted Subsidiaries,
provided such transactions are not otherwise prohibited by the Indenture; (iii)
any agreement as in effect as of the Issue Date or any amendment thereto or any
transaction contemplated thereby (including pursuant to any amendment thereto)
in any replacement agreement thereto so long as any such amendment or
replacement agreement is not more disadvantageous to the Company or its
Restricted Subsidiaries, as the case may be, in any material respect than the
original agreement as in effect on the Issue Date; (iv) Restricted Payments
permitted by the Indenture; (v) any issuance of securities or other payments,
awards or grants in cash, securities or otherwise pursuant to, or the funding
of, employment arrangements, stock options and stock ownership plans of the
Company entered into in the ordinary course of business and approved by the
Board of Directors; (vi) fees and related expenses paid pursuant to the
Management Agreement; (vii) loans and advances, or guarantees of loans of
third-parties, to employees and officers of the Company and its Restricted
Subsidiaries in the ordinary course of business for BONA FIDE business purposes
not in excess of $2,000,000 at any time outstanding; (viii) indemnification
agreements provided for the benefit of the Company or any Restricted Subsidiary
of the Company from officers, directors or employees of the Company or any
Restricted Subsidiary; (ix) all leases for equipment and real property used by
the Company which are between the Company or any Restricted Subsidiary of the
Company and either of Nancy Lim, Walter Lim or Howard Lim, and any Affiliate
thereof, (A) entered into in the ordinary course of business, on terms no less
favorable to the Company than could be obtained from a third party in an
arm's-length transaction and approved by the Board of Directors or (B) contained
in agreements in existence as of the Issue Date; and (x) the sale of inventory
in the ordinary course of
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business on customary terms no less favorable to the Company and its
Subsidiaries than could be obtained from a third party in an arm's-length
transaction.
ADDITIONAL SUBSIDIARY GUARANTEES. If the Company or any of its Restricted
Subsidiaries transfers or causes to be transferred, in one transaction or a
series of related transactions, any property to any Restricted Subsidiary (other
than a Foreign Subsidiary) that is not a Guarantor, or if the Company or any of
its Restricted Subsidiaries shall organize, acquire or otherwise invest in
another Restricted Subsidiary (other than a Foreign Subsidiary) in each case
having total assets with a book value in excess of $500,000, then such
transferee or acquired or other Restricted Subsidiary (other than a Foreign
Subsidiary) and, in the case of a transferee or acquired or other Restricted
Subsidiary (other than a Foreign Subsidiary) that does not have total assets
with a book value in excess of $500,000, when such transferee or acquired or
other Restricted Subsidiary (other than a Foreign Subsidiary) obtains assets
with a book value in excess of $500,000 shall (i) execute and deliver to the
Trustee a supplemental indenture in form reasonably satisfactory to the Trustee
pursuant to which such Restricted Subsidiary shall guarantee on a full,
unconditional, joint and several and unsecured senior subordinated basis all of
the Company's obligations under the Notes and the Indenture on the terms set
forth in the Indenture and (ii) deliver to the Trustee an opinion of counsel
that such supplemental indenture has been duly authorized, executed and
delivered by such Restricted Subsidiary and constitutes a legal, valid, binding
and enforceable obligation of such Restricted Subsidiary (with customary
exceptions). Thereafter, such Restricted Subsidiary shall be a Guarantor for all
purposes of the Indenture.
CONDUCT OF BUSINESS. The Company and its Restricted Subsidiaries will not
engage, to any material extent, in any businesses which are not the same,
similar or related to the contract packaging and manufacturing businesses.
REPORTS TO HOLDERS. The Indenture will provide that the Company will
deliver to the Trustee within 15 days after the filing of the same with the
Commission, copies of the quarterly and annual reports and of the information,
documents and other reports, if any, which the Company is required to file with
the Commission pursuant to Section 13 or 15(d) of the Exchange Act. The
Indenture further provides that, notwithstanding that the Company may not be
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company will, beginning on the earlier of the date the Registration
Statement of which this Prospectus is a part becomes effective and 180 days
after the Issue Date, file with the Commission, to the extent permitted, and
provide the Trustee and the Holders with such annual reports and such
information, documents and other reports specified in Sections 13 and 15(d) of
the Exchange Act within 15 days after the same would be required to be filed
with the Commission if the Company were subject to such reporting requirements.
The Company will also comply with the other provisions of TIA Section 314(a). So
long as any of the Notes remain outstanding, the Company has agreed to make
available to any prospective purchaser of the Notes or the beneficial owner of
the Notes in connection with any sale thereof the information required by Rule
144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) the failure to pay interest on any Notes when the same becomes due
and payable and the default continues for a period of 30 days (whether or
not such payment shall be prohibited by the subordination provisions of the
Indenture);
(ii) the failure to pay the principal on any Notes, when such principal
becomes due and payable, at maturity, upon redemption or otherwise
(including the failure to make a payment to purchase Notes tendered pursuant
to a Change of Control Offer or a Net Proceeds Offer) (whether or not such
payment shall be prohibited by the subordination provisions of the
Indenture);
(iii) a default in the observance or performance of any other covenant
or agreement contained in the Indenture which default continues for a period
of 30 days after the Company receives written
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notice specifying the default (and demanding that such default be remedied)
from the Trustee or the Holders of at least 25% of the outstanding principal
amount of the Notes (except in the case of a default with respect to the
"Merger, Consolidation and Sale of Assets" covenant, which will constitute
an Event of Default with such notice requirement but without such passage of
time requirement);
(iv) the failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount of
any Indebtedness of the Company or any Restricted Subsidiary of the Company
and such failure continues for a period of 20 days or more, or the
acceleration of the final stated maturity of any such Indebtedness (which
acceleration is not rescinded, annulled or otherwise cured within 20 days of
receipt by the Company or such Restricted Subsidiary of notice of any such
acceleration) if the aggregate principal amount of such Indebtedness,
together with the principal amount of any other such Indebtedness in default
for failure to pay principal at final maturity or which has been
accelerated, in each case with respect to which the 20-day period described
above has passed, aggregates $5,000,000 or more at any time;
(v) one or more judgments in an aggregate amount in excess of $5,000,000
(excluding judgments to the extent covered by insurance by a reputable
insurer as to which the insurer has acknowledged coverage) shall have been
rendered against the Company or any of its Restricted Subsidiaries and such
judgments remain undischarged, unpaid or unstayed for a period of 60 days
after such judgment or judgments become final and non-appealable;
(vi) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries; or
(vii) any of the Guarantees of a Significant Subsidiary ceases to be in
full force and effect or any of the Guarantees of a Significant Subsidiary
is declared to be null and void and unenforceable or any of the Guarantees
is found to be invalid or any of the Guarantors which is a Significant
Subsidiary denies its liability under its Guarantee (other than by reason of
release of a Guarantor in accordance with the terms of the Indenture).
If an Event of Default (other than an Event of Default specified in clause
(vi) above) shall occur and be continuing, the Trustee or the Holders of at
least 25% in principal amount of outstanding Notes may declare the principal of
and accrued interest on all the Notes to be due and payable by notice in writing
to the Company and the Trustee specifying the respective Event of Default and
that it is a "notice of acceleration" (the "Acceleration Notice"), and the same
(i) shall become immediately due and payable or (ii) if there are any amounts
outstanding under the Credit Agreement, shall become immediately due and payable
upon the first to occur of an acceleration under the Credit Agreement or 5
business days after receipt by the Company and the Representative under the
Credit Agreement of such Acceleration Notice. If an Event of Default specified
in clause (vi) above occurs and is continuing, then all unpaid principal of, and
premium, if any, and accrued and unpaid interest on all of the outstanding Notes
shall IPSO FACTO become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any Holder.
The Indenture will provide that, at any time after a declaration of
acceleration with respect to the Notes as described in the preceding paragraph,
the Holders of a majority in principal amount of the Notes may rescind and
cancel such declaration and its consequences (i) if the rescission would not
conflict with any judgment or decree, (ii) if all existing Events of Default
have been cured or waived except nonpayment of principal or interest that has
become due solely because of the acceleration, (iii) to the extent the payment
of such interest is lawful, interest on overdue installments of interest and
overdue principal, which has become due otherwise than by such declaration of
acceleration, has been paid, (iv) if the Company has paid the Trustee its
reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (v) in the event of the cure or waiver of an
Event of Default of the type described in clause (vi) of the description above
of Events of Default, the Trustee shall have received an officers' certificate
and an opinion of counsel that such Event of Default has been cured or waived.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto.
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The Holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its consequences,
except a default in the payment of the principal of or interest on any Notes or
except as otherwise prohibited by the TIA.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations and the obligations of the Guarantors discharged with respect to the
outstanding Notes ("Legal Defeasance"). Such Legal Defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented by the outstanding Notes, except for (i) the rights of Holders to
receive payments in respect of the principal of, premium, if any, and interest
on the Notes when such payments are due, (ii) the Company's obligations with
respect to the Notes concerning issuing temporary Notes, registration of Notes,
mutilated, destroyed, lost or stolen Notes and the maintenance of an office or
agency for payments, (iii) the rights, powers, trust, duties and immunities of
the Trustee and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, reorganization and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders cash in U.S. dollars, non-callable U.S. government obligations, or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the Notes on the stated date for
payment thereof or on the applicable redemption date, as the case may be; (ii)
in the case of Legal Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not occurred; (iii) in
the case of Covenant Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be subject
to
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federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Covenant Defeasance had not occurred; (iv)
no Default or Event of Default shall have occurred and be continuing on the date
of such deposit or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day after the
date of deposit; (v) such Legal Defeasance or Covenant Defeasance shall not
result in a breach or violation of, or constitute a default under the Indenture
or any other material agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company shall have delivered to the Trustee an officers'
certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders over any other creditors of the Company or with the
intent of defeating, hindering, delaying or defrauding any other creditors of
the Company or others; (vii) the Company shall have delivered to the Trustee an
officers' certificate and an opinion of counsel, each stating that all
conditions precedent (other than, in the case of such legal opinion, paragraph
(vi) as to which such counsel need express no opinion) provided for or relating
to the Legal Defeasance or the Covenant Defeasance have been complied with;
(viii) the Company shall have delivered to the Trustee an opinion of counsel to
the effect that (A) the trust funds will not be subject to any rights of holders
of Senior Debt, including, without limitation, those arising under the Indenture
and (B) after the 91st day following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency, reorganization
or similar laws affecting creditors' rights generally; and (ix) certain other
customary conditions precedent are satisfied.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Company directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (ii)
the Company has paid all other sums payable under the Indenture by the Company;
and (iii) the Company has delivered to the Trustee an officers' certificate and
an opinion of counsel stating that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with.
MODIFICATION OF THE INDENTURE
From time to time, the Company, the Guarantors and the Trustee, without the
consent of the Holders, may amend the Indenture for certain specified purposes,
including curing ambiguities, defects or inconsistencies, so long as such change
does not, in the opinion of the Trustee, adversely affect the rights of any of
the Holders in any material respect. In formulating its opinion on such matters,
the Trustee will be entitled to rely on such evidence as it deems appropriate,
including, without limitation, solely on an opinion of counsel. Other
modifications and amendments of the Indenture may be made with the consent of
the Holders of a majority in principal amount of the then outstanding Notes
issued under the Indenture, except that, without the consent of each Holder
affected thereby, no amendment may: (i) reduce the amount of Notes whose Holders
must consent to an amendment; (ii) reduce the rate of or change or have the
effect of changing the time for payment of interest, including defaulted
interest, on any Notes; (iii) reduce the principal of or change or have the
effect of changing the fixed maturity of any Notes, or change the date on which
any Notes may be subject to redemption or repurchase, or reduce the redemption
or repurchase price therefor; (iv) make any Notes payable in money other than
that stated in
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the Notes; (v) make any change in provisions of the Indenture protecting the
right of each Holder to receive payment of principal of and interest on such
Note on or after the due date thereof or to bring suit to enforce such payment,
or permitting Holders of a majority in principal amount of Notes to waive
Defaults or Events of Default; (vi) amend, change or modify in any material
respect the obligation of the Company to make and consummate a Change of Control
Offer after the occurrence of an event which constitutes a Change of Control or
make and consummate a Net Proceeds Offer with respect to any Asset Sale that has
been consummated or modify any of the provisions or definitions with respect
thereto; (vii) modify or change any provision of the Indenture or the related
definitions affecting the subordination or ranking of the Notes or any Guarantee
in a manner which adversely affects the Holders; or (viii) release any Guarantor
from any of its obligations under its Guarantee or the Indenture otherwise than
in accordance with the terms of the Indenture.
GOVERNING LAW
The Indenture will provide that it, the Notes and the Guarantees will be
governed by, and construed in accordance with, the laws of the State of New York
but without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be required
thereby.
THE TRUSTEE
The Indenture will provide that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the Trustee
will exercise such rights and powers vested in it by the Indenture, and use the
same degree of care and skill in its exercise as a prudent man would exercise or
use under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
Trustee will be permitted to engage in other transactions; PROVIDED that if the
Trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"ACQUIRED INDEBTEDNESS" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of
the Company or at the time it merges or consolidates with the Company or any of
its Subsidiaries or assumed in connection with the acquisition of assets from
such Person and in each case not incurred by such Person in connection with, or
in anticipation or contemplation of, such Person becoming a Restricted
Subsidiary of the Company or such acquisition, merger or consolidation.
"AFFILIATE" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.
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"ASSET ACQUISITION" means (a) an Investment by the Company or any Restricted
Subsidiary of the Company in any other Person pursuant to which such Person
shall become a Restricted Subsidiary of the Company, or shall be merged with or
into the Company or any Restricted Subsidiary of the Company, or (b) the
acquisition by the Company or any Restricted Subsidiary of the Company of the
assets of any Person (other than a Restricted Subsidiary of the Company) which
constitute all or substantially all of the assets of such Person or comprise any
division or line of business of such Person or any other properties or assets of
such Person other than in the ordinary course of business.
"ASSET SALE" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of
its Restricted Subsidiaries (including any Sale and Leaseback Transaction) to
any Person other than the Company or a Wholly-Owned Restricted Subsidiary of the
Company of (a) any Capital Stock of any Restricted Subsidiary of the Company; or
(b) any other property or assets of the Company or any Restricted Subsidiary of
the Company other than in the ordinary course of business; PROVIDED, HOWEVER,
that Asset Sales shall not include (i) a transaction or series of related
transactions for which the Company or its Restricted Subsidiaries receive
aggregate consideration of less than $500,000, (ii) the sale, lease, conveyance,
disposition or other transfer of all or substantially all of the assets of the
Company as permitted under "Merger, Consolidation and Sale of Assets" and (iii)
a disposition consisting of a Permitted Investment or Restricted Payment
permitted under "Limitation on Restricted Payments."
"BOARD OF DIRECTORS" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"BOARD RESOLUTION" means, with respect to any Person, a copy of a resolution
certified by the Secretary or an Assistant Secretary of such Person to have been
duly adopted by the Board of Directors of such Person and to be in full force
and effect on the date of such certification, and delivered to the Trustee.
"BORROWING BASE" means the sum of (i) 85% of the net book value (after
allowance for doubtful accounts) of accounts receivable (other than intercompany
receivables) of the Company and the Restricted Subsidiaries arising in the
ordinary course of business from the sale of products sold by the Company and
the Restricted Subsidiaries or the provision of services by the Company and the
Restricted Subsidiaries and (ii) 60% of the net book value (after appropriate
write-downs of obsolescence, quality problems and the like) of inventories of
the Company and the Restricted Subsidiaries held in the ordinary course of
business, in each case on a consolidated basis with Restricted Subsidiaries in
accordance with generally accepted accounting principles.
"CAPITAL STOCK" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common Stock and Preferred Stock of such Person and including any warrants,
options or rights to acquire any of the foregoing and instruments convertible
into any of the foregoing, and (ii) with respect to any Person that is not a
corporation, any and all partnership or other equity interests of such Person.
"CAPITALIZED LEASE OBLIGATIONS" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"CASH EQUIVALENTS" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from
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either Standard & Poor's Corporation ("S&P") or Moody's Investors Service, Inc.
("Moody's"); (iii) commercial paper maturing no more than one year from the date
of creation thereof and, at the time of acquisition, having a rating of at least
A-1 from S&P or at least P-1 from Moody's; (iv) certificates of deposit or
bankers' acceptances maturing within one year from the date of acquisition
thereof issued by any bank organized under the laws of the United States of
America or any state thereof or the District of Columbia or any foreign bank
having at the date of acquisition thereof combined capital and surplus of not
less than $250,000,000; (v) repurchase obligations with a term of not more than
seven days for underlying securities of the types described in clause (i) above
entered into with any bank meeting the qualifications specified in clause (iv)
above; and (vi) investments in money market funds which invest substantially all
their assets in securities of the types described in clauses (i) through (v)
above.
"CHANGE OF CONTROL" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company to any Person or group of related Persons for purposes of Section 13(d)
of the Exchange Act (a "Group") or to any Affiliates thereof (whether or not
otherwise in compliance with the provisions of the Indenture); (ii) the approval
by the holders of Capital Stock of the Company of any plan or proposal for the
liquidation or dissolution of the Company (whether or not otherwise in
compliance with the provisions of the Indenture); (iii) any Person or Group
(other than the Permitted Holders(s)) shall become the owner, directly or
indirectly, beneficially or of record, of shares representing more than 50% of
the aggregate ordinary voting power represented by the issued and outstanding
Capital Stock of the Company; or (iv) the replacement of a majority of the
directors on the Board of Directors of the Company over a two-year period from
the directors who constituted the Board of Directors of the Company at the
beginning of such period, and such replacement shall not have been approved by a
vote of at least a majority of the Board of Directors of the Company then still
in office who either were members of such Board of Directors at the beginning of
such period or whose election as a member of such Board of Directors was
previously so approved.
"COMMON STOCK" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of, such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"CONSOLIDATED EBITDA" means, with respect to any Person, for any period, the
sum (without duplication) of (i) Consolidated Net Income and (ii) to the extent
Consolidated Net Income has been reduced thereby, (A) all income taxes of such
Person and its Restricted Subsidiaries paid or accrued in accordance with GAAP
for such period (other than income taxes attributable to extraordinary or
nonrecurring gains or losses or taxes attributable to sales or dispositions
outside the ordinary course of business), (B) Consolidated Interest Expense, (C)
Consolidated Non-cash Charges LESS any non-cash items increasing Consolidated
Net Income for such period, (D) an amount equal to any extraordinary loss plus
any net loss realized in connection with an Asset Sale and (E) fees and expenses
of the Kolmar Acquisition, including, but not limited to, capitalization of
costs and expenses related thereto, all as determined on a consolidated basis
for such Person and its Restricted Subsidiaries in accordance with GAAP.
"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of
such Person for such Four Quarter Period. In addition to and without limitation
of the foregoing, for purposes of this definition, "Consolidated EBITDA" and
"Consolidated Fixed Charges" shall be calculated after giving effect on a PRO
FORMA basis for the period of such calculation to (i) the incurrence or
repayment of any Indebtedness of such Person or any of its Restricted
Subsidiaries (and the application of the proceeds thereof) giving rise to the
need to make such calculation and any incurrence or repayment of other
Indebtedness (and the
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application of the proceeds thereof), other than the incurrence or repayment of
Indebtedness in the ordinary course of business for working capital purposes
pursuant to working capital facilities, occurring during the Four Quarter Period
or at any time subsequent to the last day of the Four Quarter Period and on or
prior to the Transaction Date, as if such incurrence or repayment, as the case
may be (and the application of the proceeds thereof), occurred on the first day
of the Four Quarter Period and (ii) any Asset Sales or Asset Acquisitions
(including, without limitation, any Asset Acquisition giving rise to the need to
make such calculation as a result of such Person or one of its Restricted
Subsidiaries (including any Person who becomes a Restricted Subsidiary as a
result of the Asset Acquisition) incurring, assuming or otherwise being liable
for Acquired Indebtedness and also including any Consolidated EBITDA (provided
that such Consolidated EBITDA shall be included only to the extent includable
pursuant to the definition of "Consolidated Net Income" or to the extent it is
excluded pursuant to clause (h) of the definition of "Consolidated Net Income")
attributable to the assets which are the subject of the Asset Acquisition or
Asset Sale during the Four Quarter Period) occurring during the Four Quarter
Period or at any time subsequent to the last day of the Four Quarter Period and
on or prior to the Transaction Date, as if such Asset Sale or Asset Acquisition
(including the incurrence, assumption or liability for any such Acquired
Indebtedness) occurred on the first day of the Four Quarter Period. If such
Person or any of its Restricted Subsidiaries directly or indirectly guarantees
Indebtedness of a third Person, the preceding sentence shall give effect to the
incurrence of such guaranteed Indebtedness as if such Person or any Restricted
Subsidiary of such Person had directly incurred or otherwise assumed such
guaranteed Indebtedness; PROVIDED, HOWEVER, that where such Person and one or
more of its Restricted Subsidiaries is, or two or more of such Person's
Restricted Subsidiaries are, liable for the same Indebtedness, whether as
principal or guarantor, the above sentence shall be calculated to avoid
duplication. Furthermore, in calculating "Consolidated Fixed Charges" for
purposes of determining the denominator (but not the numerator) of this
"Consolidated Fixed Charge Coverage Ratio," (1) interest on outstanding
Indebtedness determined on a fluctuating basis as of the Transaction Date and
which will continue to be so determined thereafter shall be deemed to have
accrued at a fixed rate per annum equal to the rate of interest on such
Indebtedness in effect on the Transaction Date; (2) if interest on any
Indebtedness actually incurred on the Transaction Date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rates, then the interest rate in
effect on the Transaction Date will be deemed to have been in effect during the
Four Quarter Period; and (3) notwithstanding clause (1) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Swap Obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation of
such agreements.
"CONSOLIDATED FIXED CHARGES" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense, plus
(ii) to the extent not included in Consolidated Interest Expense, the product of
(x) the amount of all dividend payments on any series of Preferred Stock of such
Person (other than dividends paid in Qualified Capital Stock) paid, accrued or
scheduled to be paid or accrued during such period times (y) a fraction, the
numerator of which is one and the denominator of which is one minus the then
current effective consolidated federal, state and local tax rate of such Person,
expressed as a decimal.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any
period, the sum of, without duplication: (i) the aggregate of the interest
expense of such Person and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, including without
limitation, (a) any amortization of debt discount and amortization or write-off
of deferred financing costs, (b) the net costs under Interest Swap Obligations,
(c) all capitalized interest and (d) the interest portion of any deferred
payment obligation, less interest expense which is historically allocated to
discontinued operations (including, without limitation, operations disposed of
during such period whether or not such operations were classified as
discontinued) but only in the case of which such Person maintained separate
books and records with respect to such discontinued operations or such disposed
operations; and (ii) the interest component of Capitalized Lease Obligations
paid, accrued and/or scheduled to be paid or accrued by such
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Person and its Restricted Subsidiaries during such period as determined on a
consolidated basis in accordance with GAAP.
"CONSOLIDATED NET INCOME" means, with respect to any Person, for any period,
the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; PROVIDED that there shall be excluded therefrom (a) after-tax gains
from Asset Sales or abandonments or reserves relating thereto, (b) after-tax
items classified as extraordinary or nonrecurring gains, (c) the net income of
any Person acquired in a "pooling of interests" transaction accrued prior to the
date it becomes a Restricted Subsidiary of the referent Person or is merged or
consolidated with the referent Person or any Restricted Subsidiary of the
referent Person, (d) the net income (but not loss) of any Restricted Subsidiary
of the referent Person to the extent that the declaration of dividends or
similar distributions by that Restricted Subsidiary of that income is restricted
by a contract, operation of law or otherwise, except to the extent of cash
dividends or distributions paid to the referent Person or to a Restricted
Subsidiary of the referent Person by such Person, (e) the net income of any
Person, other than a Restricted Subsidiary of the referent Person, except to the
extent of cash dividends or distributions paid to the referent Person or to a
Restricted Subsidiary of the referent Person by such Person, (f) any restoration
to income of any contingency reserve, except to the extent that provision for
such reserve was made out of Consolidated Net Income accrued at any time
following the Issue Date, (g) income or loss attributable to discontinued
operations (including, without limitation, operations disposed of during such
period whether or not such operations were classified as discontinued), and (h)
in the case of a successor to the referent Person by consolidation or merger or
as a transferee of the referent Person's assets, any earnings of the successor
corporation prior to such consolidation, merger or transfer of assets.
"CONSOLIDATED NET WORTH" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
GAAP, less (without duplication) amounts attributable to Disqualified Capital
Stock of such Person.
"CONSOLIDATED NON-CASH CHARGES" means, with respect to any Person, for any
period, the aggregate depreciation, amortization and other non-cash expenses of
such Person and its Restricted Subsidiaries reducing Consolidated Net Income of
such Person and its Restricted Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP (excluding any such charges
constituting an extraordinary item or loss or any such charge which requires an
accrual of or a reserve for cash charges for any future period).
"CREDIT AGREEMENT" means the Credit Agreement dated as of January 8, 1998,
among the Company, as guarantor, Piedmont Laboratories, Inc., Aerosol Services
Company, Inc. and Kolmar Laboratories, Inc., as initial borrowers, the lenders
party thereto in their capacities as lenders thereunder and BT Commercial
Corporation, as agent, together with the related documents thereto (including,
without limitation, any guarantee agreements and security documents), in each
case as such agreements may be amended (including any amendment and restatement
thereof), supplemented or otherwise modified from time to time, including any
agreement extending the maturity of, refinancing, replacing or otherwise
restructuring (including increasing the amount of available borrowings
thereunder (PROVIDED that such increase in borrowings is permitted by the
"Limitation on Incurrence of Additional Indebtedness" covenant above) or adding
or deleting Restricted Subsidiaries of the Company as additional borrowers or
guarantors thereunder) all or any portion of the Indebtedness under such
agreement or any successor or replacement agreement and whether by the same or
any other agent, lender or group of lenders.
"CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
"DEFAULT" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
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"DESIGNATED SENIOR DEBT" means (i) Indebtedness under or in respect of the
Credit Agreement and (ii) any other Indebtedness constituting Senior Debt which,
at the time of determination, has an aggregate principal amount of at least
$25,000,000 and is specifically designated in the instrument evidencing such
Senior Debt as "Designated Senior Debt" by the Company.
"DISQUALIFIED CAPITAL STOCK" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the sole option of the holder thereof on or prior to the final
maturity date of the Notes other than the Class A Preferred Stock and Class B
Preferred Stock of the Company outstanding on the Issue Date and any Class A
Preferred Stock or Class B Preferred Stock of the Company issued as dividends on
such Class A Preferred Stock or Class B Preferred Stock and the Common Stock of
the Company which certain management stockholders have the right to put such
Common Stock to the Company pursuant to the terms of the Stockholders Agreement.
"EQUITY OFFERING" of any Person means any underwritten public offering or
any private placement of any Capital Stock of such Person other than
Indebtedness or Disqualified Capital Stock convertible or exchangeable into
Capital Stock of such Person.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or any
successor statute or statutes thereto.
"FAIR MARKET VALUE" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company delivered to the Trustee.
"FOREIGN SUBSIDIARY" means any Subsidiary of the Company which (i) is not
organized under the laws of the United States, any state thereof or the District
of Columbia and (ii) conducts substantially all of its business operations in a
country other than the United States of America.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, as are in effect from time to time.
"GUARANTOR" means (i) the domestic Restricted Subsidiaries of the Company on
the Issue Date, including, without limitation, Aerosol Services Company, Inc.,
Kolmar Laboratories, Inc., and Piedmont Laboratories, Inc., and (ii) each of the
Company's Restricted Subsidiaries that in the future executes a supplemental
indenture in which such Restricted Subsidiary agrees to be bound by the terms of
the Indenture as a Guarantor; PROVIDED that any Person constituting a Guarantor
as described above shall cease to constitute a Guarantor when its respective
Guarantee is released in accordance with the terms of the Indenture.
Notwithstanding the above, no direct or indirect Foreign Subsidiary of the
Company, including Kolmar (Aust) Pty. Ltd., Kolmar de Mexico, S.A. de C.V. and
Kolmar Canada Inc. will be considered Guarantors.
"GUARANTOR SENIOR DEBT" means, with respect to any Guarantor, the principal
of, premium, if any, interest (including any interest accruing subsequent to the
filing of a petition of bankruptcy at the rate provided for in the documentation
with respect thereto, whether or not such interest is an allowed claim under
applicable law), fees and expenses on any Indebtedness of a Guarantor, whether
outstanding on the Issue Date or thereafter created, incurred or assumed,
unless, in the case of any particular Indebtedness, the instrument creating or
evidencing the same or pursuant to which the same is outstanding expressly
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provides that such Indebtedness shall not be senior in right of payment to the
Guarantee of such Guarantor. Without limiting the generality of the foregoing,
"Guarantor Senior Debt" shall also include the principal of, premium, if any,
interest (including any interest accruing subsequent to the filing of a petition
of bankruptcy at the rate provided for in the documentation with respect
thereto, whether or not such interest is an allowed claim under applicable law)
on, and all other amounts owing in respect of, (x) all monetary obligations of
every nature under the Credit Agreement, including, without limitation,
obligations to pay principal and interest, reimbursement obligations under
letters of credit, fees, expenses and indemnities, (y) all Interest Swap
Obligations and (z) all obligations under Currency Agreements, in each case
whether outstanding on the Issue Date or thereafter incurred. Notwithstanding
the foregoing, "Guarantor Senior Debt" shall not include (i) any Indebtedness of
such Guarantor to a Restricted Subsidiary of such Guarantor, (ii) Indebtedness
to, or guaranteed on behalf of, any director, officer or employee of either of
such Guarantor or any Restricted Subsidiary of such Guarantor (including,
without limitation, amounts owed for compensation), (iii) Indebtedness to trade
creditors and other amounts incurred in connection with obtaining goods,
materials or services, (iv) Indebtedness represented by Disqualified Capital
Stock, (v) any liability for federal, state, local or other taxes owed or owing
by such Guarantor, (vi) Indebtedness to the extent incurred in violation of the
Indenture provisions set forth under "Limitation on Incurrence of Additional
Indebtedness," (vii) Indebtedness which, when incurred and without respect to
any election under Section 1111(b) of Title 11, United States Code, is without
recourse to the Company and (viii) any Indebtedness which is, by its express
terms, subordinated in right of payment to any other Indebtedness of such
Guarantor.
"INDEBTEDNESS" means with respect to any Person, without duplication, (i)
all Obligations of such Person for borrowed money, (ii) all Obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all Capitalized Lease Obligations of such Person, (iv) all Obligations of such
Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and other accrued liabilities
arising in the ordinary course of business that are not overdue by 90 days or
more or are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted), (v) all Obligations for the reimbursement
of any obligor on any letter of credit, banker's acceptance or similar credit
transaction, (vi) guarantees and other contingent obligations in respect of
Indebtedness referred to in clauses (i) through (v) above and clause (viii)
below, (vii) all Obligations of any other Person of the type referred to in
clauses (i) through (vi) which are secured by any lien on any property or asset
of such Person, the amount of such Obligation being deemed to be the lesser of
the fair market value of such property or asset or the amount of the Obligation
so secured, (viii) all Obligations under currency agreements and interest swap
agreements of such Person and (ix) all Disqualified Capital Stock issued by such
Person with the amount of Indebtedness represented by such Disqualified Capital
Stock being equal to the greater of its voluntary or involuntary liquidation
preference and its maximum fixed repurchase price, but excluding accrued
dividends, if any. For purposes hereof, the "maximum fixed repurchase price" of
any Disqualified Capital Stock which does not have a fixed repurchase price
shall be calculated in accordance with the terms of such Disqualified Capital
Stock as if such Disqualified Capital Stock were purchased on any date on which
Indebtedness shall be required to be determined pursuant to the Indenture, and
if such price is based upon, or measured by, the fair market value of such
Disqualified Capital Stock, such fair market value shall be determined
reasonably and in good faith by the Board of Directors of the issuer of such
Disqualified Capital Stock.
"INDEPENDENT FINANCIAL ADVISOR" means a firm (i) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company and (ii) which, in the judgment of
the Board of Directors of the Company, is otherwise independent and qualified to
perform the task for which it is to be engaged.
"INTEREST SWAP OBLIGATIONS" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic
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payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for periodic payments made by such other
Person calculated by applying a fixed or a floating rate of interest on the same
notional amount and shall include, without limitation, interest rate swaps,
caps, floors, collars and similar agreements.
"INVESTMENT" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any other Person. "Investment" shall exclude extensions of trade credit by
the Company and its Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Restricted
Subsidiary, as the case may be. For the purposes of the "Limitation on
Restricted Payments" covenant, (i) "Investment" shall include and be valued at
the fair market value of the net assets of any Restricted Subsidiary at the time
that such Restricted Subsidiary is designated an Unrestricted Subsidiary and
shall exclude the fair market value of the net assets of any Unrestricted
Subsidiary at the time that such Unrestricted Subsidiary is designated a
Restricted Subsidiary and (ii) the amount of any Investment (other than as
specified in clause (i) above) shall be the original cost of such Investment
plus the cost of all additional Investments by the Company or any of its
Restricted Subsidiaries, without any adjustments for increases or decreases in
value, or write-ups, write-downs or write-offs with respect to such Investment,
reduced by the payment of dividends, distributions, interest payments or
repayments of loans or advances in connection with such Investment or any other
amounts received in respect of such Investment; PROVIDED that no such payment of
dividends, distributions, interest payments, repayments of loans or advances or
receipt of any such other amounts shall reduce the amount of any Investment if
such payment of dividends, distributions, interest payments, repayments of loans
or advances or receipt of any such amounts would be included in Consolidated Net
Income. If the Company or any Restricted Subsidiary of the Company sells or
otherwise disposes of any Common Stock of any direct or indirect Restricted
Subsidiary of the Company such that, after giving effect to any such sale or
disposition, it ceases to be a Subsidiary of the Company, the Company shall be
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Common Stock of such Restricted Subsidiary
not sold or disposed of.
"ISSUE DATE" means the date of original issuance of the Notes.
"JOINT VENTURE" means a joint venture, partnership or other similar
arrangement, whether in corporate, partnership or other legal form; PROVIDED,
HOWEVER, that, as to any such arrangement in corporate form, such corporation
shall not, as to any Person of which such corporation is a Subsidiary, be
considered to be a Joint Venture to which such person is a party.
"KOLMAR ACQUISITION" means the acquisition by the Company of all the
outstanding stock of Kolmar Laboratories, Inc. and the net assets of Kolmar
Canada from CCL Industries, Inc. and its subsidiary CCL Industries Corporation
for a total purchase price of $78 million.
"LIEN" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"MANAGEMENT AGREEMENT" means the Amended and Restated Management Services
Letter agreement, dated January 8, 1998, among the Company, Aerosol Services
Company, Inc., Piedmont Laboratories, Inc., The Gordon + Morris Group, Kolmar
Laboratories, Inc. and each of its subsidiaries as such letter agreement exists
on the Issue Date.
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"NET CASH PROCEEDS" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest) received by
the Company or any of its Restricted Subsidiaries from such Asset Sale net of
(a) reasonable out-of-pocket expenses and fees relating to such Asset Sale
(including, without limitation, legal, accounting and investment banking fees
and sales commissions), (b) taxes paid or payable after taking into account any
reduction in consolidated tax liability due to available tax credits or
deductions and any tax sharing arrangements, (c) repayment of Indebtedness that
is required to be repaid in connection with such Asset Sale and (d) appropriate
amounts to be provided by the Company or any Restricted Subsidiary, as the case
may be, as a reserve, in accordance with GAAP, against any liabilities
associated with such Asset Sale and retained by the Company or any Restricted
Subsidiary, as the case may be, after such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale.
"OBLIGATIONS" means all obligations for principal, premium, interest,
penalties, fees, matured indemnifications, reimbursements, damages and other
liabilities payable under the documentation governing any Indebtedness.
"PERMITTED HOLDER(S)" means HarbourVest Venture Partners--IV Direct Fund
L.P., The
Gordon+Morris Group, Gordon+Morris Investment Partnership, L.P. and their
respective Affiliates.
"PERMITTED INDEBTEDNESS" means, without duplication, each of the following:
(i) Indebtedness under the Notes offered hereby and the Guarantees
thereof;
(ii) Indebtedness incurred pursuant to the Credit Agreement in an
aggregate principal amount at any time outstanding not to exceed the greater
of (a) $70,000,000 in the aggregate with respect to Indebtedness under the
Revolving Credit Facility, less the amount of all permanent prepayment of
Indebtedness under the Credit Agreement actually made with the proceeds of
an Asset Sale, or (b) the Borrowing Base;
(iii) other Indebtedness of the Company and its Restricted Subsidiaries
outstanding on the Issue Date reduced by the amount of any scheduled
amortization payments or mandatory prepayments when actually paid or
permanent reductions thereon;
(iv) Interest Swap Obligations of the Company or any of its Restricted
Subsidiaries covering Indebtedness of the Company or any of its Restricted
Subsidiaries and Interest Swap Obligations of any Restricted Subsidiary of
the Company covering Indebtedness of such Restricted Subsidiary; PROVIDED,
HOWEVER, that such Interest Swap Obligations are entered into to protect the
Company and its Restricted Subsidiaries from fluctuations in interest rates
on Indebtedness incurred in accordance with the Indenture to the extent the
notional principal amount of such Interest Swap Obligation does not exceed
the principal amount of the Indebtedness to which such Interest Swap
Obligation relates;
(v) Indebtedness under Currency Agreements; PROVIDED that in the case of
Currency Agreements which relate to Indebtedness, such Currency Agreements
do not increase the Indebtedness of the Company and its Restricted
Subsidiaries outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and compensation
payable thereunder;
(vi) Indebtedness of a Wholly-Owned Restricted Subsidiary of the Company
to the Company or to a Wholly-Owned Restricted Subsidiary of the Company for
so long as such Indebtedness is held by the Company or a Wholly-Owned
Restricted Subsidiary of the Company, in each case subject to no Lien (other
than a Lien in connection with the Credit Agreement) held by a Person other
than the Company or a Wholly-Owned Restricted Subsidiary of the Company;
PROVIDED that if as of any date any Person other than the Company or a
Wholly-Owned Restricted Subsidiary of the Company owns
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or holds any such Indebtedness or holds a Lien in respect of such
Indebtedness (other than a Lien in connection with the Credit Agreement),
such date shall be deemed the incurrence of Indebtedness not constituting
Permitted Indebtedness by the issuer of such Indebtedness;
(vii) Indebtedness of the Company to a Wholly-Owned Restricted Subsidiary
of the Company for so long as such Indebtedness is held by a Wholly-Owned
Restricted Subsidiary of the Company, in each case subject to no Lien (other
than a Lien in connection with the Credit Agreement); PROVIDED that (a) any
Indebtedness of the Company to any Wholly-Owned Restricted Subsidiary of the
Company is unsecured and subordinated in right of payment, pursuant to a
written agreement, to the Company's obligations under the Indenture and the
Notes and (b) if as of any date any Person other than a Wholly-Owned
Restricted Subsidiary of the Company owns or holds any such Indebtedness or
any Person holds a Lien in respect of such Indebtedness (other than a Lien
in connection with the Credit Agreement), such date shall be deemed the
incurrence of Indebtedness not constituting Permitted Indebtedness by the
Company;
(viii) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently drawn
against insufficient funds in the ordinary course of business; PROVIDED,
HOWEVER, that such Indebtedness is extinguished within two business days of
incurrence;
(ix) Indebtedness of the Company or any of its Restricted Subsidiaries
in order to finance insurance premiums and other Indebtedness represented by
letters of credit for the account of the Company or such Restricted
Subsidiary, as the case may be, in order to provide security for workers'
compensation claims, payment obligations in connection with self-insurance
or similar requirements, all in the ordinary course of business;
(x) Obligations in respect of performance and surety bonds and
completion guarantees provided by the Company or any Restricted Subsidiary
of the Company in the ordinary course of business, in accordance with
customary industry practice, in amounts and for purposes customary in the
Company's industry;
(xi) Indebtedness arising from agreements of the Company or a Restricted
Subsidiary of the Company providing for adjustment of purchase price, earn
out or other similar obligations, in each case, incurred or assumed in
connection with the disposition of any business, assets or a Restricted
Subsidiary of the Company or any of its Restricted Subsidiaries, other than
guarantees of Indebtedness incurred by any Person acquiring all or any
portion of such business, assets or Restricted Subsidiary for the purpose of
financing such acquisition; PROVIDED that the maximum assumable liability in
respect of all such Indebtedness shall at no time exceed the gross proceeds
actually received by the Company and its Restricted Subsidiaries in
connection with such disposition;
(xii) Capitalized Lease Obligations and Purchase Money Obligations of the
Company and its Restricted Subsidiaries incurred in the ordinary course of
business not to exceed $5.0 million at any one time outstanding;
(xiii) Guarantees of Indebtedness permitted to be incurred under the
Indenture and guarantees of third-party loans to employees or officers of
the Company or its Restricted Subsidiaries permitted by clause (iv) of the
definition of "Permitted Investments;"
(xiv) Refinancing Indebtedness; and
(xv) additional Indebtedness of the Company or its Restricted
Subsidiaries in an aggregate principal amount not to exceed $5,000,000 in
the aggregate at any one time outstanding.
"PERMITTED INVESTMENTS" means (i) Investments by the Company or any
Restricted Subsidiary of the Company in any Person that is or will become
immediately after such Investment a Restricted Subsidiary of the Company or that
will merge or consolidate into the Company or a Restricted Subsidiary of the
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Company, (ii) Investments in the Company by any Restricted Subsidiary of the
Company; PROVIDED that any Indebtedness evidencing such Investment is unsecured
and subordinated in right of payment, pursuant to a written agreement, to the
Company's obligations under the Notes and the Indenture; (iii) Investments in
cash and Cash Equivalents; (iv) loans and advances to, or guarantees of
third-party loans to, employees and officers of the Company and its Restricted
Subsidiaries for relocation expenses and purchasing Common Stock of the Company
not in excess of $2,000,000 at any one time outstanding; (v) Currency Agreements
and Interest Swap Obligations entered into in the ordinary course of the
Company's or its Restricted Subsidiaries' businesses and otherwise in compliance
with the Indenture; (vi) Investments in securities of trade creditors or
customers received pursuant to any plan of reorganization or similar arrangement
upon the bankruptcy or insolvency of such trade creditors or customers; (vii)
Investments made by the Company or its Restricted Subsidiaries as a result of
consideration received in connection with an Asset Sale made in compliance with
the "Limitation on Asset Sales" covenant; (viii) Investments in Joint Ventures
in businesses reasonably related or complimentary to the Company and its
Restricted Subsidiaries made in the ordinary course of business and Investments
in minority interests created by the sale or disposition of Common Stock of any
Restricted Subsidiary of the Company, having an aggregate fair market value,
taken together with all other Investments made pursuant to this clause (viii)
that are at that time outstanding, not to exceed 4% of Total Assets at the time
of such Investment (with the fair market value of each such Investment being
measured at the time made and without giving effect to subsequent changes in
value); (ix) Investments the payment for which consists exclusively of Qualified
Capital Stock of the Company; (x) guarantees of Indebtedness permitted to be
incurred under the Indenture; and (xi) additional Investments not to exceed
$1,500,000 at any time outstanding.
"PERMITTED LIENS" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries shall
have set aside on its books such reserves as may be required pursuant to
GAAP;
(ii) statutory Liens of landlords or of mortgagees of landlords and
Liens of carriers, warehousemen, mechanics, suppliers, materialmen,
repairmen and other Liens imposed by law incurred in the ordinary course of
business for sums not yet delinquent or being contested in good faith, if
such reserve or other appropriate provision, if any, as shall be required by
GAAP shall have been made in respect thereof;
(iii) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business consistent with past practice in
connection therewith, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government contracts,
performance and return-of-money bonds and other similar obligations
(exclusive of obligations for the payment of borrowed money);
(iv) judgment Liens not giving rise to an Event of Default so long as
such Lien is adequately bonded and any appropriate legal proceedings which
may have been duly initiated for the review of such judgment shall not have
been finally terminated or the period within which such proceedings may be
initiated shall not have expired;
(v) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company or
any of its Restricted Subsidiaries;
(vi) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or assets
which is not leased property subject to such Capitalized Lease Obligation or
other property subject to a Permitted Lien held by the lien holder of such
Capitalized Lease Obligation;
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(vii) purchase money Liens to finance property or assets (including the
cost of construction) of the Company or any Restricted Subsidiary of the
Company acquired in the ordinary course of business; PROVIDED, HOWEVER, that
(A) the related purchase money Indebtedness shall not exceed the cost of
such property or assets (including the cost of construction) and shall not
be secured by any property or assets of the Company or any Restricted
Subsidiary of the Company other than the property and assets so acquired and
(B) the Lien securing such Indebtedness shall be created within 90 days of
such acquisition or construction;
(viii) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods or
construction;
(ix) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
(x) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and
set-off;
(xi) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;
(xii) Liens securing Indebtedness under Currency Agreements;
(xiii) Liens securing Acquired Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant; PROVIDED
that (A) such Liens secured such Acquired Indebtedness at the time of and
prior to the incurrence of such Acquired Indebtedness by the Company or a
Restricted Subsidiary of the Company and were not granted in connection
with, or in anticipation of, the incurrence of such Acquired Indebtedness by
the Company or a Restricted Subsidiary of the Company and (B) such Liens do
not extend to or cover any property or assets of the Company or of any of
its Restricted Subsidiaries other than the property or assets that secured
the Acquired Indebtedness prior to the time such Indebtedness became
Acquired Indebtedness of the Company or a Restricted Subsidiary of the
Company and are no more favorable to the lienholders than those securing the
Acquired Indebtedness prior to the incurrence of such Acquired Indebtedness
by the Company or a Restricted Subsidiary of the Company;
(xiv) Liens arising out of consignment or similar arrangements for the
sale of goods in the ordinary course of business;
(xv) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of the Company and its
Restricted Subsidiaries;
(xvi) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(xvii) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of custom duties in connection with the
importation of goods; and
(xviii) Liens incurred in the ordinary course of business of the Company
or any Restricted Subsidiary of the Company with respect to obligations that
do not exceed $2,500,000 at any one time outstanding and that (a) are not
incurred in connection with the borrowing of money or the obtaining of
advances or credit (other than trade credit in the ordinary course of
business) and (b) do not in the aggregate materially detract from the value
of the property or materially impair the use thereof in the operation of
business by the Company or such Restricted Subsidiary.
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"PERSON" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"PREFERRED STOCK" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"PURCHASE MONEY OBLIGATIONS" of any Person means any obligations of such
Person or any of its subsidiaries to any seller or any other person incurred or
assumed in connection with the purchase of real or personal property to be used
in the business of such person or any of its subsidiaries within 180 days of
such purchase.
"QUALIFIED CAPITAL STOCK" means any Capital Stock that is not Disqualified
Capital Stock or Indebtedness that is convertible or exchangeable into Capital
Stock.
"REFINANCE" means, in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.
"REFINANCING INDEBTEDNESS" means any Refinancing by the Company or any
Restricted Subsidiary of the Company of Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant (other than
pursuant to clause (ii), (iv), (v), (vi), (vii), (viii), (ix), (x), (xi), (xii),
(xiii) or (xv) of the definition of Permitted Indebtedness) and Indebtedness
outstanding on the Issue Date reduced by the amount of any scheduled
amortization payments or mandatory prepayments actually paid or permanent
reductions thereon, in each case that does not (1) result in an increase in the
aggregate principal amount of Indebtedness of such Person as of the date of such
proposed Refinancing (plus the amount of any premium required to be paid under
the terms of the instrument governing such Indebtedness and plus the amount of
reasonable expenses incurred by the Company in connection with such Refinancing)
or (2) create Indebtedness with (A) a Weighted Average Life to Maturity that is
less than the Weighted Average Life to Maturity of the Indebtedness being
Refinanced or (B) a final maturity earlier than the final maturity of the
Indebtedness being Refinanced; PROVIDED that (x) if such Indebtedness being
Refinanced is Indebtedness solely of the Company, then such Refinancing
Indebtedness shall be Indebtedness solely of the Company and (y) if such
Indebtedness being Refinanced is subordinate or junior to the Notes, then such
Refinancing Indebtedness shall be subordinate to the Notes at least to the same
extent and in the same manner as the Indebtedness being Refinanced.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement
dated as of the Issue Date among the Company, the Guarantors and BT.
"REPRESENTATIVE" means the indenture trustee or other trustee, agent or
representative in respect of any Designated Senior Debt; PROVIDED that if, and
for so long as, any Designated Senior Debt lacks such a representative, then the
Representative for such Designated Senior Debt shall at all times constitute the
holders of a majority in outstanding principal amount of such Designated Senior
Debt in respect of any Designated Senior Debt.
"RESTRICTED SUBSIDIARY" of any Person means any Subsidiary of such Person
which at the time of determination is not an Unrestricted Subsidiary.
"REVOLVING CREDIT FACILITY" means one or more revolving credit facilities
under the Credit Agreement.
"SALE AND LEASEBACK TRANSACTION" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether owned
by the Company or any Restricted Subsidiary at the Issue Date or later acquired,
which has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such Property.
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"SENIOR DEBT" means the principal of, premium, if any, interest (including
any interest accruing subsequent to the filing of a petition of bankruptcy at
the rate provided for in the documentation with respect thereto, whether or not
such interest is an allowed claim under applicable law), fees and expenses on
any Indebtedness of the Company, whether outstanding on the Issue Date or
thereafter created, incurred, assumed or guaranteed, unless, in the case of any
particular Indebtedness, the instrument creating or evidencing the same or
pursuant to which the same is outstanding expressly provides that such
Indebtedness shall not be senior in right of payment to the Notes. Without
limiting the generality of the foregoing, "Senior Debt" shall also include the
principal of, premium, if any, interest (including any interest accruing
subsequent to the filing of a petition of bankruptcy at the rate provided for in
the documentation with respect thereto, whether or not such interest is an
allowed claim under applicable law) on, and all other amounts owing in respect
of, (x) all monetary obligations of every nature under the Credit Agreement,
including, without limitation, obligations to pay principal and interest,
reimbursement obligations under letters of credit, fees, expenses and
indemnities, (y) all Interest Swap Obligations and (z) all obligations under
Currency Agreements, in each case whether outstanding on the Issue Date or
thereafter incurred. Notwithstanding the foregoing, "Senior Debt" shall not
include (i) any Indebtedness of the Company to a Subsidiary of the Company, (ii)
Indebtedness to, or guaranteed on behalf of, any director, officer or employee
of either of the Company or any of its Subsidiaries (including, without
limitation, amounts owed for compensation), (iii) Indebtedness to trade
creditors and other amounts incurred in connection with obtaining goods,
materials or services, (iv) Indebtedness represented by Disqualified Capital
Stock, (v) any liability for federal, state, local or other taxes owed or owing
by the Company, (vi) Indebtedness to the extent incurred in violation of the
Indenture provisions set forth under "Limitation on Incurrence of Additional
Indebtedness," (vii) Indebtedness which, when incurred and without respect to
any election under Section 1111(b) of Title 11, United States Code, is without
recourse to the Company and (viii) any Indebtedness which is, by its express
terms, subordinated in right of payment to any other Indebtedness of the
Company.
"SIGNIFICANT SUBSIDIARY" shall have the meaning set forth in Rule 1.02(w) of
Regulation S-X under the Securities Act.
"STOCKHOLDERS AGREEMENT" means that Amended and Restated Stockholders
Agreement, dated as of June 30, 1997, among the Company and certain stockholders
of the Company, as amended as of December 31, 1997 and as in effect on the Issue
Date.
"SUBSIDIARY" with respect to any Person, means (i) any corporation of which
the outstanding Capital Stock having at least a majority of the votes entitled
to be cast in the election of directors under ordinary circumstances shall at
the time be owned, directly or indirectly, by such Person or (ii) any other
Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"TOTAL ASSETS" means total consolidated assets of the Company and its
Restricted Subsidiaries, as set forth on the Company's most recent consolidated
balance sheet.
"UNRESTRICTED SUBSIDIARY" of any Person means (i) any Subsidiary of such
Person that at the time of determination shall be or continue to be designated
an Unrestricted Subsidiary by the Board of Directors of such Person in the
manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The
Board of Directors may designate any Subsidiary (including any newly acquired or
newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary
owns any Capital Stock of, or owns or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; PROVIDED that (x) the Company certifies to the
Trustee that such designation complies with the "Limitation on Restricted
Payments" covenant and (y) each Subsidiary to be so designated and each of its
Subsidiaries has not at the time of designation, and does not thereafter,
create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable with respect to any Indebtedness pursuant to which the lender
has recourse to any of the assets of the Company or any of its
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Restricted Subsidiaries. The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary only if (x) immediately after giving
effect to such designation, the Company is able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) in compliance with
the "Limitation on Incurrence of Additional Indebtedness" covenant and (y)
immediately before and immediately after giving effect to such designation, no
Default or Event of Default shall have occurred and be continuing. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the Board of Directors resolution
giving effect to such designation and an officers' certificate certifying that
such designation complied with the foregoing provisions.
"WARRANT AGREEMENT" means the Amended and Restated Warrant Agreement, dated
as of January 8, 1998, between the Company and Chase Manhattan Capital, L.P. and
as in effect on the Issue Date.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"WHOLLY-OWNED RESTRICTED SUBSIDIARY" of any Person means any Restricted
Subsidiary of such Person of which all the outstanding voting securities (other
than in the case of a foreign Restricted Subsidiary, directors' qualifying
shares or an immaterial amount of shares required to be owned by other Persons
pursuant to applicable law) are owned by such Person or any Wholly-Owned
Restricted Subsidiary of such Person.
EXCHANGE OFFER; REGISTRATION RIGHTS
The following summary of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is filed as an exhibit to the Registration Statement
to which this Prospectus forms a part.
Pursuant to the Registration Rights Agreement, each of the Company and the
Guarantors agreed that they, at their cost, for the benefit of the Holders, to
the extent not prohibited by any applicable law or applicable interpretation of
the staff of the Commission (i) prepare and, on or prior to July 1, 1998 (the
"Filing Date"), file with the Commission this Registration Statement with
respect to the Exchange Offer, (ii) use their best efforts to cause this
Registration Statement to be declared effective by the Commission under the
Securities Act on or prior to August 31, 1998, and (iii) commence the Exchange
Offer and use their best efforts to issue, on or prior to the date (the
"Consummation Date") that is 35 days immediately following the date that this
Registration Statement shall have been declared effective, the New Notes. The
offer and sale of the New Notes pursuant to the Exchange Offer is being
registered pursuant to this Registration Statement and will be duly registered
or qualified under all applicable state securities or Blue Sky laws and will
comply with all applicable tender offer rules and regulations under the Exchange
Act and state securities or Blue Sky laws. The Exchange Offer is not subject to
any condition, other than that the Exchange Offer does not violate any
applicable law or interpretation of the staff of the Commission.
If, prior to consummation of the Exchange Offer, BT holds any Notes acquired
by it and having, or which are reasonably likely to be determined to have, the
status of an unsold allotment in the initial distribution, or any other holder
of Old Notes is not entitled to participate in the Exchange Offer, the Company
and the Guarantors, upon the request of such Initial Purchaser or any such
holder, shall, simultaneously with the delivery of the New Notes in the Exchange
Offer, issue and deliver to such Initial Purchaser and any such holder, in
exchange (the "Private Exchange") for such Old Notes held by such Initial
Purchaser and any such holder, a like principal amount of debt securities of the
Company, guaranteed by each of the Guarantors on a senior subordinated basis,
that are identical in all material respects to the New Notes other than transfer
restrictions (the "Private Exchange Notes").
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Interest on each New Note or Private Exchange Note will accrue (A) from the
later of (i) the last interest payment date on which interest was paid on the
Old Note surrendered in exchange therefor, or (ii) if the Old Note is
surrendered for exchange on a date in a period which includes the record date
for an interest payment date to occur on or after the date of such exchange and
as to which interest will be paid, the date of such interest payment date or (B)
if no interest has been paid on the Old Notes, from March 3, 1998.
Under existing interpretations of the Commission contained in several
no-action letters to third parties, the New Notes (and the related Guarantees)
will be freely transferable by holders thereof (other than affiliates of any of
the Company or the Guarantors) after the Exchange Offer without further
registration under the Act; provided, however, that the Company and the
Guarantors may require each holder of Old Notes, as a condition to its
participation in the Exchange Offer, to represent to the Company and the
Guarantors and their counsel in writing (which may be contained in the
applicable letter of transmittal) that at the time of the consummation of the
Exchange Offer (i) any New Notes received by such holder will be acquired in the
ordinary course of its business, (ii) such holder will have no arrangement or
understanding with any person to participate in the distribution (within the
meaning of the Securities Act) of the New Notes and (iii) such holder is not an
affiliate (as defined in Rule 405 promulgated under the Securities Act) of the
Company, or if it is an affiliate of the Company, it will comply with the
registration and prospectus delivery requirements of the Securities Act, to the
extent applicable.
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of the
New Notes. If the holder is a broker-dealer that will receive New Notes for its
own account in exchange for Old Notes that were acquired as a result of
market-making activities or other trading activities (a "Participating
Broker-Dealer"), it will be required to acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. Each of the Company
and the Guarantors has agreed to make available, during the period required by
the Securities Act, a prospectus meeting the requirements of the Securities Act
for use by Participating Broker-Dealers and other persons, if any, with similar
prospectus delivery requirements for use in connection with any resale of the
New Notes.
If (i) the Company and the Guarantors are not permitted to file this
Registration Statement or to consummate the Exchange Offer because the Exchange
Offer is not permitted by any applicable law or applicable interpretation of the
staff of the Commission or (ii) any holder of an Old Note notifies the Company
that (A) due to a change in law or policy it is not entitled to participate in
the Exchange Offer, (B) due to a change in law or policy it may not resell New
Notes acquired by it in the Exchange Offer to the public without delivering a
prospectus and this Prospectus is not appropriate or available for such resales
by such holder or (C) it owns Old Notes (including if BT holds Old Notes as part
of an unsold allotment from the original offering of the Old Notes) acquired
directly from the Company or a Guarantor or an affiliate of the Company or a
Guarantor or (iii) any holder of Private Exchange Notes so requests after the
consummation of the Private Exchange or (iv) the Company and the Guarantors have
not consummated the Exchange Offer within 215 days after March 3, 1998 (each
such event referred to in clauses (i) through (iv), a "Shelf Filing Event"), the
Company and the Guarantors shall (a) promptly deliver to the holders and the
Trustee notice thereof and (b) at their own expense cause to be filed with the
Commission pursuant to Rule 415 a shelf registration statement (the "Shelf
Registration Statement") as promptly as practicable and in any event prior to 60
days after the Company and the Guarantors become aware that such filing
obligation arises relating to all Transfer Restricted Notes (as defined) (the
"Shelf Registration") the holders of which have provided certain information
requested by the Company (provided that if the Shelf Filing Event arises
pursuant to clause (iv) above, the Company and the Guarantors shall file the
Shelf Registration Statement on or prior to the 216th day after March 3, 1998),
and shall use their best efforts to have the Shelf Registration Statement
declared effective by the Commission on or prior to 60 days after the filing
thereof (the "Shelf Effective Date"). In such
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circumstances, the Company and the Guarantors shall use their best efforts to
keep the Shelf Registration Statement continuously effective under the
Securities Act, until (A) two years (or such shorter period as may be
established by any amendment to the two year period set forth in Rule 144(k)
under the Securities Act) following the Shelf Effective Date or (B) if sooner,
the date immediately following the date that all Transfer Restricted Notes
covered by the Shelf Registration Statement have been sold pursuant thereto or
otherwise cease to be Transfer Restricted Notes (the "Effectiveness Period").
For purposes of the foregoing, a "Transfer Restricted Note" means each Old
Note, each New Note as to which clause (ii) of the preceding paragraph is
applicable, and each Private Exchange Note, in each case upon original issuance
thereof and at all time subsequent thereto until the earliest to occur of (A)
the date on which any such note has been exchanged by a person other than a
Participating Broker-Dealer for a New Note (other than with respect to a New
Note as to which clause (ii) of the preceding paragraph applies) pursuant to the
Exchange Offer, (B) with respect to New Notes received by Participating Broker-
Dealers in the Exchange Offer, the earlier of (x) the date on which such New
Note has been sold by such Participating Broker-Dealer by means of this
Prospectus and (y) the date on which this Registration Statement has been
effective under the Securities Act for a period of six months after the date
that is 35 days immediately following the date that this Registration Statement
shall have been declared effective, (C) a Shelf Registration Statement covering
such Old Note, New Note or Private Exchange Note has been declared effective by
the Commission and such Old Note, New Note or Private Exchange Note, as the case
may be, has been disposed of in accordance with such effective Shelf
Registration Statement, (D) the date on which such Old Note, New Note or Private
Exchange Note, as the case may be, is eligible for distribution to the public
without volume or manner of sale restrictions pursuant to Rule 144(k) or (E) the
date on which such Old Note, New Note or Private Exchange Note, as the case may
be, ceases to be outstanding for purposes of the Indenture or any other
indenture under which such Old Note, New Note or Private Exchange Note was
issued.
If the Company and the Guarantors fail to comply with the above provisions
or if this Registration Statement or the Shelf Registration Statement fails to
become effective, then, liquidated damages (the "Liquidated Damages") shall
become payable in respect of the Old Notes as follows:
(i) if (A) neither this Registration Statement nor the Shelf
Registration Statement is filed with the Commission on or prior to the
Filing Date or (B) notwithstanding that the Company and the Guarantors have
consummated or will consummate an Exchange Offer, the Company and the
Guarantors are required to file a Shelf Registration Statement and such
Shelf Registration Statement is not filed on or prior to the date required
by the Registration Rights Agreement, then commencing on the day after
either such required filing date, Liquidated Damages shall accrue on the
principal amount of the Old Notes at a rate of 0.5% per annum for the first
90 days immediately following each such filing date, such Liquidated Damages
rate increasing by an additional 0.5% per annum at the beginning of each
subsequent 90-day period; or
(ii) if (A) this Registration Statement or a Shelf Registration
Statement has been filed with the Commission but neither this Registration
Statement nor a Shelf Registration Statement is declared effective by the
Commission on or prior to 60 days after the applicable required filing date
or (B) notwithstanding that the Company and the Guarantors have consummated
or will consummate an Exchange Offer, the Company and the Guarantors are
required to file a Shelf Registration Statement and such Shelf Registration
Statement is not declared effective by the Commission on or prior to the
60th day following the date such Shelf Registration Statement was required
to be filed, then, commencing on the day after the 60th day following the
applicable required filing date, Liquidated Damages shall accrue on the
principal amount of the Old Notes at a rate of 0.5% per annum for the first
90 days immediately following such date, such Liquidated Damages rate
increasing by an additional 0.5% per annum at the beginning of each
subsequent 90-day period; or
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(iii) if (A) the Company and the Guarantors have not exchanged New Notes
for all Old Notes validly tendered in accordance with the terms of the
Exchange Offer on or prior to the 36th day after the date on which this
Registration Statement was declared effective or (B) if applicable, the
Shelf Registration Statement has been declared effective and such Shelf
Registration Statement ceases to be effective at any time prior to the
expiration of the Effectiveness Period, then Liquidated Damages shall accrue
on the principal amount of the Old Notes at a rate of 0.5% per annum for the
first 90 days commencing on (x) the 36th day after such effective date, in
the case of (A) above, or (y) the day such Shelf Registration Statement
ceases to be effective in the case of (B) above, such Liquidated Damages
rate increasing by an additional 0.5% per annum at the beginning of each
subsequent 90-day period; provided, however, that the Liquidated Damages
rate on the Old Notes may not exceed in the aggregate 2.00% per annum;
provided, further, however, that (1) upon the filing of this
Registration Statement or a Shelf Registration Statement (in the case of
clause (i) above), (2) upon the effectiveness of this Registration Statement
or a Shelf Registration Statement (in the case of clause (ii) above), or (3)
upon the exchange of New Notes for all Old Notes validly tendered in
accordance with the terms of the Exchange Offer (in the case of clause (iii)
(A) above), or upon the effectiveness of the Shelf Registration Statement
which had ceased to remain effective (in the case of clause (iii) (B)
above), Liquidated Damages on the Old Notes as a result of such clause (or
the relevant subclause thereof), as the case may be, shall cease to accrue.
Liquidated Damages will not accrue because of the suspension of a Shelf
Registration Statement during the pendency of certain blackout periods.
Any Liquidated Damages will be payable in cash to record holders in the same
manner as interest will be payable on the Old Notes. Holders of Old Notes, who
tender such Notes in the Exchange Offer agree to waive any accrued but upaid
Liquidated Damages on such Old Notes. An amount equal to the amount of accrued
and unpaid Liquidated Damages on Old Notes tendered in the Exchange Offer shall
be payable to registered holders of New Notes on the record date for the first
interest payment following the consummation of the Exchange Offer.
No holder of Transfer Restricted Notes shall be entitled to Liquidated
Damages payable in connection with any Shelf Registration Statement unless and
until such holder shall have provided certain information reasonably requested
by the Company for use in connection with such Shelf Registration Statement.
BOOK ENTRY; DELIVERY AND FORM
Except as described in the next paragraph, the New Notes initially will be
represented by a single, permanent global Note, in definitive, fully registered
form without interest coupons (the "Global Note"). The Global Note will be
deposited on the date on which the Exchange Offer is consumated with, or on
behalf of, DTC and registered in the name of a nominee of DTC.
New Notes held by Holders who elect to take physical delivery of their
certificates instead of holding their interests through a Global Note (and which
are thus ineligible to trade through DTC) (collectively referred to herein as
the "Non-Global Purchasers") will be issued in registered form (the
"Certificated Security"). Upon the transfer of any Certificated Security
initially issued to a Non-Global Purchaser, such Certificated Security will,
unless the transferee requests otherwise or the Global Note has previously been
exchanged in whole for Certificated Securities, be exchanged for an interest in
a Global Note.
THE GLOBAL NOTE. The Company expects that pursuant to procedures
established by DTC (i) upon the issuance of the Global Note, DTC or its
custodian will credit, on its internal system, the principal amount of New Notes
of the individual beneficial interests represented by such Global Note to the
respective accounts of persons who have accounts with such depositary and (ii)
ownership of beneficial interests in the Global Note will be shown on, and the
transfer of such ownership will be effected only through, records maintained by
DTC or its nominee (with respect to interests of participants) and the records
of participants (with respect to interests of persons other than participants).
Ownership of
103
<PAGE>
beneficial interests in the Global Note will be limited to persons who have
accounts with DTC ("participants") or persons who hold interests through
participants. Holders may hold their interests in the Global Note directly
through DTC if they are participants in such system, or indirectly through
organizations which are participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the New Notes represented by the Global Note for all
purposes under the Indenture. No beneficial owner of an interest in the Global
Note will be able to transfer that interest except in accordance with DTC's
procedures, in addition to those provided for under the Indenture with respect
to the New Notes.
Payments of the principal of, premium (if any), and interest on, the Global
Note will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. None of the Company, the Trustee or any paying agent will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Note or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest on the Global Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Note as
shown on the records of DTC or its nominee. The Company also expects that
payments by participants to owners of beneficial interests in the Global Note
held through such participants will be governed by standing instructions and
customary practice, as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such payments
will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a holder requires physical delivery of a
Certificated Security for any reason, including to sell New Notes to persons in
states which require physical delivery of the New Notes, or to pledge such
securities, such holder must transfer its interest in the Global Note, in
accordance with the normal procedures of DTC and with the procedures set forth
in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of New Notes only at the direction of one or more participants
to whose account the DTC interests in the Global Note are credited and only in
respect of such portion of the aggregate principal amount of New Notes as to
which such participant or participants has or have given such direction.
However, if there is an Event of Default under the Indenture, DTC will exchange
the Global Note for Certificated Securities, which it will distribute to its
participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and to facilitate the clearance and settlement
of securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
104
<PAGE>
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
CERTIFICATED SECURITIES. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Note and a successor depositary is not
appointed by the Company within 90 days, Certificated Securities will be issued
in exchange for the Global Note.
CERTAIN FEDERAL TAX CONSEQUENCES
The following is a summary of certain Federal income tax consequences
associated with the exchange of Old Notes for New Notes and the disposition of
the New Notes. This summary is based upon existing Federal income tax law, which
is subject to change, possibly retroactively. This summary does not discuss all
aspects of Federal income taxation which may be important to particular Holders
in light of their individual investment circumstances, such as Notes held by
investors subject to special tax rules (E.G., financial institutions, insurance
companies, broker-dealers, tax-exempt organizations, or foreign investors) or to
persons that hold the Old Notes or will hold the New Notes as a part of a
straddle, hedge, or synthetic security transaction for Federal income tax
purposes, all of whom may be subject to tax rules that differ significantly from
those summarized below. In addition, this summary does not discuss any foreign,
state, or local tax considerations. This summary addresses tax consequences only
to current Holders of Notes and assumes that such Holders hold their Old Notes
and will hold their New Notes as "capital assets" (E.G., generally, property
held for investment). Holders are urged to consult their tax advisors regarding
the Federal, state, local and foreign income and other tax considerations
associated with the exchange of Old Notes for New Notes and the disposition of
the New Notes.
EXCHANGE OF NOTES
There will be no Federal income tax consequences to a Holder exchanging an
Old Note for a New Note pursuant to the Exchange Offer and such holder will have
the same adjusted basis and holding period in the New Note as it had in the Old
Note immediately before the exchange.
DISPOSTION OF NEW NOTES
In general, subject to the market discount rules discussed below, a Holder
of a New Note will recognize capital gain or loss upon the sale, redemption, or
other disposition of the New Note in an amount equal to the difference between
the amount realized (except to the extent attributable to accrued but unpaid
interest) in such disposition and the Holder's adjusted tax basis in the New
Note. Under recently adopted amendments to the Internal Revenue Code, net
capital gain (I.E., generally, capital gain in excess of capital loss)
recognized by an individual Holder upon a disposition of a New Note that has
been held for more than 12 months will generally be subject to a maximum tax
rate of 20% or, in the case of a New Note that has been held for 12 months or
less, will be subject to tax at ordinary income tax rates. In addition, capital
gain recognized by a corporate Holder will be subject to tax at the ordinary
income tax rates applicable to corporations.
MARKET DISCOUNT
Holders, other than original purchasers of the Old Notes in the original
offering, should be aware that the sale of the New Notes may be affected by the
market discount provisions of the Internal Revenue Code. These rules generally
provide that if a Holder of a Note purchased such note, subsequent to the
original offering, at a market discount in excess of a statutorily defined DE
MINIMIS amount, and thereafter recognizes gain upon a disposition (including a
partial redemption) of the New Note received in exchange for such Old Note, the
lesser of such gain or the portion of the market discount that accrued while the
Old Note and New Note were held by such holder will be treated as ordinary
interest income at the time of disposition. The rules also provide that a Holder
who acquires a Note at a market discount may be
105
<PAGE>
required to defer a portion of any interest expense that may otherwise be
deductible on any indebtedness incurred or maintained to purchase or carry such
note until the Holder disposes of such note in a taxable transaction. If a
Holder of such a note elects to include market discount in income currently,
both of the foregoing rules would not apply.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver this Prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. Until [ ], 1998, all dealers effecting
transactions in the New Notes may be required to deliver this Prospectus. The
Company has agreed that, for a period of 90 days after the Expiration Date, it
will make this Prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchaser of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any commission
or concessions received by any such person may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that, by
acknowledging that it will deliver and by delivering this Prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
For a period of 90 days after the Expiration Date, the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal. The Company has agreed to pay all expenses in connection with
the Exchange Offer and to reimburse BT for the reasonable fees and expenses of
counsel for the Holders of the Notes. Each Holder will pay all expenses of its
counsel other than as described in the preceding sentence, transfer taxes, if
any, and any commissions or concessions of any brokers or dealers. The Company
has agreed in the Registration Rights Agreement to indemnify the Holders of the
Notes (including any broker-dealer) against certain liabilities, including
liabilities under the Securities Act.
In addition, to comply with the securities laws of certain jurisdictions,
the New Notes may not be offered or sold unless they have been registered or
qualified for offer and sale in such jurisdiction or an exemption from
registration or qualification is available and is complied with. The Company has
agreed, pursuant to the Registration Rights Agreement, subject to certain
limitations specified therein, to register or qualify the New Notes for offer or
sale under all applicable state securities or Blue Sky laws by the time the
Registration Statement (of which this Prospectus forms a part) is declared
effective by the Commission.
LEGAL MATTERS
Certain legal matters with respect to the New Notes offered hereby will be
passed upon for the Company by its special counsel, Skadden, Arps, Slate,
Meagher & Flom LLP, Los Angeles, California.
106
<PAGE>
CHANGE IN INDEPENDENT ACCOUNTANTS
PREVIOUS INDEPENDENT ACCOUNTANTS
On October 25, 1996, the Company dismissed Coopers & Lybrand L.L.P. as its
independent accountants. The report of Coopers & Lybrand L.L.P. on the Company's
financial statements for the fiscal year ended December 31, 1995 contained no
adverse opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principle. The Company's Board of
Directors participated in and approved the decision to change independent
accountants. In connection with its audit for the fiscal year ended December 31,
1995, and through October 25, 1996, there were no disagreements with Coopers &
Lybrand L.L.P. on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements if not
resolved to the satisfaction of Coopers & Lybrand L.L.P. would have caused them
to make reference thereto in their report on the financial statements for such
year.
During the fiscal year ended December 31, 1995, and through October 25,
1996, there were no reportable events (as defined in Regulations S-K Item
304(a)(1)(v)).
NEW INDEPENDENT ACCOUNTANTS
The Company engaged Deloitte & Touche LLP as its new independent accountants
as of October 25, 1996. During the fiscal year ended December 31, 1995 and
through October 25, 1996, the Company did not consult with Deloitte & Touche LLP
regarding either (i) the application of accounting principles to a specific
transaction either completed or proposed or the type of audit opinion that might
be rendered on the Company's financial statements, and neither a written report
was provided to the Company nor oral advice was provided that Deloitte & Touche
LLP concluded was an important factor considered by the Company in reaching a
decision as to the accounting, auditing or financial reporting issue; or (ii)
any matter that was either the subject of a disagreement, as that term is
defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to
Item 304 of Regulation S-K, or a reportable event, as that term is defined in
Item 304(a)(1)(v) of Regulation S-K.
EXPERTS
The consolidated financial statements of Outsourcing Services Group, Inc. as
of December 31, 1997 and 1996 and for the years then ended, included in this
Prospectus, have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and have been so included in reliance
on the report of such firm given upon their authority as experts in accounting
and auditing.
The consolidated financial statements of operations, stockholders' deficit
and cash flows of Outsourcing Services Group, Inc. and subsidiary for the year
ended December 31, 1995 included in this Prospectus, have been included herein
in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
The combined financial statements of Kolmar Group included in this
Prospectus, have been audited by KPMG Peat Marwick LLP, independent certified
public accountants, to the extent and for the periods indicated in their report
thereon. Such combined financial statements have been included in reliance upon
the report of KPMG Peat Marwick LLP.
The financial statements of Piedmont Laboratories, Inc. as of September 29,
1996, and for the year then ended, included in this Prospectus, have been
audited by Moore, Colson & Company, P.C., independent auditors, as stated in
their report appearing herein.
107
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
OUTSOURCING SERVICES GROUP, INC. PAGE
----
<S> <C>
Condensed consolidated balance sheets as of December 31, 1997 and June 27,
1998 (unaudited)........................................................ F-2
Condensed consolidated statements of operations and comprehensive income
(unaudited) for the six month periods ended June 29, 1997 and June 27,
1998.................................................................... F-3
Condensed consolidated statements of cash flows (unaudited) for the six
month periods ended June 29, 1997 and June 27, 1998..................... F-4
Notes to condensed consolidated financial statements (unaudited).......... F-6
Independent auditors' report of Deloitte & Touche LLP..................... F-16
Report of independent accountants of Coopers & Lybrand L.L.P. ............ F-17
Consolidated balance sheets as of December 31, 1996 and 1997.............. F-18
Consolidated statements of operations for the years ended December 31,
1995, 1996 and 1997..................................................... F-19
Consolidated statements of stockholders' deficit for the years ended
December 31, 1995, 1996 and 1997........................................ F-20
Consolidated statements of cash flows for the years ended December 31,
1995, 1996 and 1997..................................................... F-21
Notes to consolidated financial statements................................ F-23
KOLMAR GROUP
Independent auditors' report of KPMG Peat Marwick LLP..................... F-46
Combined balance sheets as of December 31, 1996 and 1997.................. F-47
Combined statements of operations for the years ended December 30, 1995,
1996 and 1997........................................................... F-48
Combined statements of stockholders' deficit for the years ended December
30, 1995,
1996 and 1997........................................................... F-49
Combined statements of cash flows for the years ended December 30, 1995,
1996 and 1997........................................................... F-50
Notes to combined financial statements.................................... F-51
PIEDMONT LABORATORIES, INC.
Independent auditors' report of Moore, Colson & Company, P.C. ............ F-61
Balance sheet as of September 29, 1996.................................... F-62
Statement of income and retained earnings for the year ended September 29,
1996.................................................................... F-63
Statement of cash flows for the year ended September 29, 1996............. F-64
Notes to financial statements............................................. F-65
</TABLE>
F-1
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND JUNE 27, 1998
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 27,
1997 1998
------------- -----------
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................... $ 338 $ 4,131
Short-term investments.............................................................. 250 250
Trade accounts receivable, net...................................................... 17,319 38,608
Other receivables................................................................... 330 292
Inventories, net.................................................................... 12,125 27,517
Prepaid expenses.................................................................... 174 844
Deferred income taxes............................................................... 376 376
------------- -----------
Total current assets.............................................................. 30,912 72,018
PROPERTY AND EQUIPMENT, net........................................................... 10,188 29,016
DEPOSITS AND OTHER ASSETS............................................................. 98 --
DEFERRED INCOME TAXES................................................................. 1,014 6,080
GOODWILL, net......................................................................... 7,857 58,044
DEFERRED FINANCING COSTS.............................................................. 1,111 7,521
ENVIRONMENTAL INSURANCE RECEIVABLE.................................................... -- 8,250
DUE FROM CCL, net..................................................................... -- 3,376
OTHER INTANGIBLE ASSETS, net.......................................................... 661 1,061
------------- -----------
$ 51,841 $ 185,366
------------- -----------
------------- -----------
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Trade accounts payable.............................................................. $ 13,349 $ 23,920
Current maturities of long-term debt................................................ 1,600 267
Accrued payroll and other compensation.............................................. 1,269 2,346
Accrued interest.................................................................... 235 3,759
Accrued property taxes.............................................................. 305 335
Refundable trade discount........................................................... 649 300
Other liabilities................................................................... 910 10,989
------------- -----------
Total current liabilities......................................................... 18,317 41,906
DEFERRED TAXES........................................................................ -- 506
ENVIRONMENTAL RESERVE AND OTHER LIABILITIES........................................... -- 19,235
LONG-TERM DEBT, net of current maturities............................................. 34,591 106,578
------------- -----------
Total liabilities................................................................... 52,908 168,225
REDEEMABLE SERIES A PREFERRED STOCK, $.001 par value; 3,750 shares authorized, issued
and outstanding..................................................................... 375 384
REDEEMABLE SERIES B PREFERRED STOCK, $.001 par value; 26,250 shares authorized, issued
and outstanding..................................................................... 3,884 3,990
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.001 par value; 6,000,000 shares authorized; 1,267,174 and 3,360,174
shares issued and outstanding as of December 31, 1997 and June 27, 1998
respectively...................................................................... 1 3
Common stock warrants............................................................... 828 828
Additional paid-in capital.......................................................... 12,662 33,590
Accumulated deficit................................................................. (9,102) (11,475)
Accumulated other comprehensive income:
Foreign currency translation, adjustment.......................................... -- (464)
------------- -----------
4,389 22,482
Less predecessor carryover basis adjustment......................................... (9,715) (9,715)
------------- -----------
Total stockholders' equity (deficit).............................................. (5,326) 12,767
------------- -----------
$ 51,841 $ 185,366
------------- -----------
------------- -----------
</TABLE>
See notes to condensed consolidated financial statements.
F-2
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 29, 1997 AND JUNE 27, 1998
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------
(UNAUDITED)
JUNE 29, JUNE 27,
1997 1998
------------ ------------
<S> <C> <C>
NET REVENUES.......................................................................... $ 51,776 $ 114,969
COST OF GOODS SOLD.................................................................... 44,426 97,233
------------ ------------
GROSS PROFIT.......................................................................... 7,350 17,736
SELLING, GENERAL AND ADMINISTRATION................................................... 5,224 10,443
------------ ------------
INCOME FROM OPERATIONS................................................................ 2,126 7,293
INTEREST EXPENSE, NET................................................................. 2,354 6,092
OTHER INCOME, NET..................................................................... -- (7)
------------ ------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY ITEM................ (228) 1,208
PROVISION FOR INCOME TAXES............................................................ 84 1,312
------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM........................................................ (312) (104)
EXTRAORDINARY ITEM, LOSS FROM EARLY EXTINGUISHMENT OF DEBT, net of tax benefit of $633
and $1,429.......................................................................... 1,060 2,145
------------ ------------
NET INCOME (LOSS)..................................................................... (1,372) (2,249)
OTHER COMPREHENSIVE LOSS:
Foreign currency translation adjustment net of tax of $309 for the six months ended
June 27, 1998..................................................................... -- (464)
------------ ------------
COMPREHENSIVE LOSS.................................................................... $ (1,372) $ (2,713)
------------ ------------
------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM PER SHARE.............................................. $ (0.23) $ (0.03)
LOSS FROM EXTRAORDINARY ITEM PER SHARE................................................ $ (0.80) $ (0.66)
LOSS PER SHARE--Basic and Diluted..................................................... $ (1.03) $ (0.69)
WEIGHTED AVERAGE COMMON SHARES--BASIC AND DILUTED..................................... 1,329,842 3,255,524
</TABLE>
See notes to condensed consolidated financial statements.
F-3
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 29, 1997 AND JUNE 27, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 29, JUNE 27,
1997 1998
--------- ----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................................................... $ (1,372) $ (2,249)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization............................................................... 2,480 3,949
Amortization of deferred financing costs.................................................... 1,983 281
Provision for doubtful accounts............................................................. 61 64
Extraordinary item--loss from early extinguishment of debt.................................. 1,060 2,145
Deferred income taxes....................................................................... 161 2,876
Change in operating assets and liabilities, net of effect of Kolmar acquisition:
Notes receivable.......................................................................... -- 369
Trade accounts receivable................................................................. 2,526 (4,460)
Income taxes receivable/payable........................................................... 143 --
Inventories............................................................................... (2,256) (4,678)
Trade accounts payable.................................................................... 1,890 1,672
Other assets.............................................................................. (2,321) (10,974)
Other liabilities......................................................................... 684 5,491
--------- ----------
Net cash provided by (used in) operating activities......................................... 5,039 (5,514)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................................................ (542) (929)
Other....................................................................................... -- (1,180)
Sale of property, plant or equipment........................................................ -- 41
Acquisition of Kolmar Laboratories, net of cash acquired.................................... -- (77,951)
--------- ----------
Net cash used in investing activities....................................................... (542) (80,019)
</TABLE>
See notes to condensed consolidated financial statements.
F-4
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 29, 1997 AND JUNE 27, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 29, JUNE 27,
1997 1998
--------- ----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing acquisition............................................................. $ (1,099) $ --
Net repayments on revolving loans.......................................................... (3,191) (8,863)
Borrowing on senior subordinated notes..................................................... -- 105,000
Borrowing on senior bridge loans........................................................... -- 70,000
Borrowing payable to former competitor..................................................... -- 250
Repayments on senior term loans............................................................ -- (19,750)
Repayments of senior bridge loans.......................................................... -- (70,000)
Repayments of senior subordinated debt..................................................... -- (6,000)
Repayment of debt due to affiliate......................................................... -- (2,232)
Payment of dividends on preferred stock.................................................... -- (9)
Proceeds from the issuance of common stock................................................. -- 20,930
--------- ----------
Net cash (used in) provided by financing activities...................................... (4,290) 89,326
--------- ----------
NET INCREASE IN CASH....................................................................... 207 3,793
CASH AND CASH EQUIVALENTS, beginning of period............................................. 260 338
--------- ----------
CASH AND CASH EQUIVALENTS, end of period................................................... $ 467 $ 4,131
--------- ----------
--------- ----------
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS--
Accretion attributable to preferred stock................................................ $ 35 $ 115
--------- ----------
--------- ----------
Effective January 1, 1998, the Company acquired all the capital stock of Kolmar
Laboratories, Inc. and net assets of Kolmar Canada Inc. In conjunction with the
acquisition, liabilities were assumed as follows:
Fair value of assets acquired.......................................................... $ 63,358
Intangible assets acquired............................................................. 51,277
Cash paid for capital stock............................................................ (77,951)
----------
Liabilities assumed...................................................................... $ 36,684
----------
----------
</TABLE>
See notes to condensed consolidated financial statements.
F-5
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 29, 1997 AND JUNE 27, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements included herein have
been prepared by Outsourcing Services Group, Inc. ("OSG" or the "Company")
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Certain information and footnote disclosures,
normally included in financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted pursuant to such
SEC rules and regulations; nevertheless, the management of the Company believes
that the disclosures herein are adequate to make the information presented not
misleading. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto for
the year ended December 31, 1997. In the opinion of management, the condensed
consolidated financial statements included herein reflect all adjustments
necessary to present fairly the consolidated financial position of the Company
as of June 27, 1998, the results of its operations for the six month period
ended June 27, 1998, and its cash flows for the six month period ended June 27,
1998. The results of operations for the interim periods are not necessarily
indicative of the results of operations for the full year.
As of January 1, 1998, the Company acquired from CCL Industries, all of the
outstanding shares of Kolmar Laboratories, Inc. and the net assets of Kolmar
Canada Inc., (collectively referred to as the Kolmar Group) for $78.0 million,
subject to certain post-closing adjustments. The acquisition has been treated as
a purchase for accounting purposes. Accordingly, the assets acquired and
liabilities assumed have been recorded at their estimated fair values at the
date of acquisition.
The allocation of the purchase price is as follows:
<TABLE>
<S> <C>
Kolmar acquisition price....................................... $77,951,000
Capital lease assumption....................................... 49,000
Kolmar acquisition costs....................................... 1,826,000
-----------
Total acquisition cost....................................... 79,826,000
Adjusted net worth of Kolmar
(adjusted for assets and liabilities not
assumed and adjustments to conform
accounting policies)......................................... (33,253,000)
-----------
Amount to be allocated......................................... 46,573,000
Less amount allocated to record
various tangible and intangible assets and
liabilities at fair value.................................... 1,232,000
-----------
Purchase price in excess of
net assets acquired.......................................... $47,805,000
-----------
-----------
</TABLE>
Goodwill associated with the Kolmar Acquisition is being amortized on a
straight-line basis over a 40 year period.
Assuming the Kolmar Group acquisition had occurred on January 1, 1997, pro
forma net revenue and net loss for OSG for the year ended December 31, 1997
would have been approximately $213,469,000 and $857,000, respectively.
F-6
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 29, 1997 AND JUNE 27, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION (CONTINUED)
In conjunction with the Kolmar Group acquisition, the Company refinanced all
of its existing indebtedness. Deferred financing costs of $1,111,000 associated
with this indebtedness were written off in the first quarter of 1998. The
purchase price and the repayment of existing debt, plus $7.4 million of related
fees and expenses were financed through $30.0 million of borrowings under a
senior secured credit facility, $70.0 million of borrowings under a senior
subordinated credit agreement, and the issuance of 2,093,000 shares of the
Company's common stock to existing stockholders of the Company. Loans under the
senior secured credit facility and the senior subordinated credit agreement bear
interest at rates of approximately 9.25% and 11.6%, respectively.
On March 3, 1998, the Company repaid indebtedness incurred in conjunction
with the Kolmar Group acquisition, using the proceeds from the issuance of $105
million senior subordinated notes which are due in 2006. Interest on the notes
is payable semiannually in arrears on March 1 and September 1 of each year,
commencing September 1, 1998, at the rate of 10.875% per annum. The notes are
redeemable in whole or in part at the option of the Company, on or after March
1, 2003 at the redemption price of 110.875% of the aggregate principal amount to
be redeemed plus accrued and unpaid interest to the redemption date. In
addition, at any time on or prior to March 1, 2001, the Company, at its option,
may redeem up to 35% of the aggregate principal amount of the notes originally
issued with the net cash proceeds of one or more equity offerings at the
redemption price plus accrued and unpaid interest to the redemption date;
provided that at least 65% of the aggregate principal amount of the notes
originally issued remains outstanding immediately after such redemption. The
notes are unsecured senior subordinated obligations of the Company and are
subordinated in right of payment to all existing and future senior debt of the
Company.
2. EARNINGS PER SHARE
The Company has adopted SFAS No. 128, Earnings per Share, which replaces the
presentation of "primary" earnings per share with "basic" earnings per share and
the presentation of "fully diluted" earnings per share with "diluted" earnings
per share. All previously reported earnings per share amounts have been restated
based on the provisions of the new standard. Basic earnings per share are based
upon the weighted average number of common shares outstanding. Diluted earnings
per share amounts are based upon the weighted average number of common and
common equivalent shares for each period presented. Common equivalent shares
include stock options assuming conversion under the treasury stock method.
3. NEW ACCOUNTING PRONOUNCEMENTS
In the first quarter ended March 28, 1998, the Company adopted SFAS No. 130,
REPORTING COMPREHENSIVE INCOME. This statement establishes standards for the
reporting and display of comprehensive income and its components. June 29, 1997
statements have been restated based on the provisions of the new standard. For
the fiscal year ending December 31, 1998, the Company will adopt SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION and SFAS No.
132, DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS. SFAS No. 133,
ACCOUNTING FOR DERIVITIVE INSTRUMENTS AND HEDGING ACTIVITIES, will be adopted in
the quarter ended September 30, 1999. However, management believes that the
adoption of SFAS No. 133 will not impact the financial statements of the Company
as the Company is not currently involved in, nor does it anticipate being
involved in, derivative instruments or hedging activities.
F-7
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 29, 1997 AND JUNE 27, 1998
(UNAUDITED)
4. INVENTORY
Inventories consisted of the following at December 31, 1997 and June 27,
1998 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 27,
1997 1998
------------ ---------
<S> <C> <C>
Raw materials........................................................ $ 18,087 $ 20,167
Work in progress..................................................... 4,944 4,748
Finished Goods....................................................... 4,652 7,104
------------ ---------
27,683 32,019
------------ ---------
Less reserve for excess and obsolete inventories..................... (2,927) (4,502)
------------ ---------
$ 24,756 $ 27,517
</TABLE>
5. CONTINGENCIES
ENVIRONMENTAL CONTINGENCIES
The Company is subject to loss contingencies resulting from environmental
laws and regulations, which include obligations to remove or remediate the
effects on the environment of the disposal or release of certain wastes and
substances at various sites. The Company has established accruals in current
dollars for those hazardous waste sites where it is probable that a loss has
been incurred and the amount of the loss can reasonably be estimated. The
reliability and precision of the loss estimates are affected by numerous
factors, such as different stages of site evaluation, the allocation of
responsibility among potentially responsible parties and the assertion of
additional claims. The Company adjusts its accruals as new remediation
requirements are defined, as information becomes available permitting reasonable
estimates to be made, and to reflect new and changing facts. The Company also
has established receivables for insurance recoveries (for liabilities on
existing sites) that are probable of collection.
At December 27, 1997 and June 27, 1998, the Company had established
environmental remediation accruals in the amount of $14,500,000.
The Company potentially has minor responsibility for the remediation of four
environmental sites for which accruals have been established. These sites are
well advanced in the investigation and cleanup stage. The Company's
environmental accruals at December 31, 1997 and June 27, 1998, included $750,000
for these sites. The site with the largest total potential cost to the Company
is a nonoperating site. Of the above accruals, this site accounted for
$8,500,000 at December 31, 1997 and June 27, 1998. At December 31, 1997 and June
27, 1998, the Company has a long-term receivable totaling $8,250,000 for
insurance recoveries on this site which are probable of collection.
The Company maintains environmental exposure for one other site. To date the
Company has not been named a potentially responsible party for this site but
maintained an accrual of $5,250,000 as of December 31, 1997 and June 27, 1998,
based on the advice of outside counsel, for an estimate of probable groundwater
and soil remediation costs. The Company believes this estimate would cover the
full remediation of the site.
While it is impossible at this time to determine with certainty the ultimate
outcome of the environmental matters referred to in this note, management
believes that adequate provisions have been made for probable losses with
respect thereto and that such ultimate outcome, after provisions therefore, will
not have a material adverse effect on the combined financial position of the
Company, but could have a
F-8
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 29, 1997 AND JUNE 27, 1998
(UNAUDITED)
5. CONTINGENCIES (CONTINUED)
material effect on combined results of operations in a given year. It is
reasonably possible that changes in estimates of recorded obligations and
related receivables may occur in the near term. Should any losses be sustained
in connection with any of such environmental matters in excess of provisions
therefore, they will be charged to income in the future.
LITIGATION
A claim has been asserted by the U.S. Environmental Protection Agency
against the Company potentially responsible for the remediation of a superfund
site near Port Jervis, New York. The proceedings remain administrative only, and
are not pending as litigation in any U.S. District Court. The Company has
reserves for any potential liability that may arise out of this claim and has
recorded insurance receivables relating to this claim which it believes are
probable of recovery.
There are certain other legal proceedings and claims pending against the
Company arising out of the normal course of business in which claims for
monetary damages are asserted.
While it is not feasible to predict the outcome of these legal proceedings
and claims with certainty, management is of the belief that any ultimate
liabilities in excess of reserved amounts will not individually or in the
aggregate have a material adverse effect on the Company's financial position or
results of operations.
6. SUPPLEMENTAL GUARANTOR INFORMATION
The payment obligations of the Company under the Notes are to be guaranteed
by certain of the Company's wholly owned domestic subsidiaries ("Guarantors").
Such guarantees are full, unconditional and joint and several. Separate
financial statements of the Guarantors are not presented because the Company's
management has determined that they would not be material to investors. The
following financial information presents the unaudited condensed combined
balance sheets as of June 27, 1998 and June 29, 1997 and the unaudited condensed
combined statements of income and cash flows for the six months ended June 27,
1998 and June 29, 1997 of the Guarantors, representing Kolmar, ASC and Piedmont
and the nonguarantors which consist of Kolmar Canada, a division of CCL, Kolmar
de Mexico S.A. de C.V. and Kolmar (Aust.) Pty. Limited. The financial
information is intended to provide information for the Guarantor and
nonguarantor operations of the Company, based on amounts derived from the
financial statements of the Company and of the Kolmar Group, as of and for the
periods presented.
The condensed combined Guarantor and nonguarantor financial information is
presented for informational purposes only and does not purport to represent the
combined financial position or results of operations of these entities as of the
date presented, or to project their financial condition or results of operations
for any future period or date. The condensed combined Guarantor and nonguarantor
financial information should be read in conjunction with the historical
consolidated financial statements and related notes and the "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
contained elsewhere in the Registration Statement. Each Guarantor is a
wholly-owned subsidiary of the Company and has fully and unconditionally
guaranteed the Notes on a joint and several basis. The Company has not presented
separate financial statements and other disclosures concerning the Guarantors
because management has determined that such information is not material to
investors.
F-9
<PAGE>
CONDENSED COMBINED BALANCE SHEET AT JUNE 27, 1998 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY GUARANTORS
-------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASC AND KOLMAR-US COMBINED CONSOLIDATED
PIEDMONT OPERATIONS GUARANTORS NONGUARANTORS OSG ELIMINATIONS TOTAL
----------- ----------- ----------- --------------- --------- ------------ ------------
ASSETS:
Current Assets:
Cash............................. $ 1,009 $ 2,804 $ 3,813 $ 318 $ 4,131
Accounts Receivable, net......... 19,829 14,478 34,421 4,478 38,899
Other receivables................ 114
Inventories...................... 15,270 8,282 23,552 3,964 27,516
Prepaid expenses and other
current assets................. 568 407 975 283 1,258
----------- ----------- ----------- ------ --------- ------------ ------------
Total Current Assets............. 36,790 25,971 62,761 9,043 71,804
Property and equipment, net...... 9,781 14,809 24,590 4,427 29,017
Goodwill, net.................... 6,898 51,146 58,044 58,044
Intercompany receivable
(payable)...................... 2,151 5,258 7,409 (7,028) (381)
Investment in subsidiaries....... 9,779 128,903 (138,682)
Other long- term assets.......... 1,980 25,864 18,065 170 7,038 25,273
----------- ----------- ----------- ------ --------- ------------ ------------
Total Assets..................... $ 57,600 $ 123,048 $ 180,648 $ 6,612 $ 135,560 $ (138,682) $ 184,138
----------- ----------- ----------- ------ --------- ------------ ------------
----------- ----------- ----------- ------ --------- ------------ ------------
LIABILITIES:
Accounts payable................. $ 15,389 $ 6,198 $ 21,587 $ 1,800 23,387
Other payables................... 353 353 180 533
Accrued liabilities.............. 3,683 6,202 9,885 3,882 3,230 16,997
Current portion of long-term
debt........................... 266 266 1 267
----------- ----------- ----------- ------ --------- ------------ ------------
Total current liabilities........ 19,072 13,019 32,091 5,863 3,230 41,184
Long-term debt, less current
portion........................ 1,568 6,574 8,142 (6,574) 105,010 106,578
Other liabilities................ 19,235 19,235 19,235
----------- ----------- ----------- ------ --------- ------------ ------------
Total Liabilities................ 20,640 38,828 59,468 (711) 108,240 166,997
Redeemable Preferred Stock....... 4,374 4,374
Stockholders' Equity (Deficit)... 36,960 84,220 121,180 7,323 22,946 (138,682) 12,767
----------- ----------- ----------- ------ --------- ------------ ------------
Total Liabilities and
Stockholders' Equity........... $ 57,600 $ 123,048 $ 180,648 $ 6,612 $ 135,560 $ (138,682) $ 184,138
----------- ----------- ----------- ------ --------- ------------ ------------
----------- ----------- ----------- ------ --------- ------------ ------------
</TABLE>
F-10
<PAGE>
CONDENSED COMBINED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 27, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY GUARANTORS
-------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASC AND KOLMAR-US COMBINED CONSOLIDATED
PIEDMONT OPERATIONS GUARANTORS NONGUARANTORS OSG ELIMINATIONS TOTAL
----------- ----------- ----------- --------------- --------- ------------- ------------
Net Revenues..................... $ 66,101 $ 39,819 $ 105,920 $ 9,049 $ 114,969
Cost of Goods of Sold............ 58,435 30,880 89,315 7,917 97,232
----------- ----------- ----------- ------ --------- ------ ------------
Gross Profit..................... 7,666 8,939 16,605 1,132 17,737
Selling, General and
Administrative Expense......... 4,390 4,744 9,134 1,166 136 10,436
----------- ----------- ----------- ------ --------- ------ ------------
Income (Loss) From Operations.... 3,276 4,195 7,471 (34) (136) 7,301
Interest Expense, net............ (541) (136) (677) (198) (5,217) (6,092)
----------- ----------- ----------- ------ --------- ------ ------------
Income (Loss) Before Provision
for Income Taxes............... 2,735 4,059 6,794 (232) (5,353) 1,209
Provision for Income Taxes....... 1,423 1,813 3,236 215 (2,138) 1,313
----------- ----------- ----------- ------ --------- ------ ------------
Income (Loss) Before
Extraordinary Item............. 1,312 2,246 3,558 (447) (3,215) (104)
Extraordinary Item--Loss from
Early Extinguishment of Debt... (617) (617) (1,528) (2,145)
----------- ----------- ----------- ------ --------- ------ ------------
Net Income (Loss)................ $ 695 $ 2,246 $ 2,941 $ (447) $ (4,743) $ $ (2,249)
----------- ----------- ----------- ------ --------- ------ ------------
----------- ----------- ----------- ------ --------- ------ ------------
</TABLE>
RATIO OF EARNINGS TO FIXED CHARGES FOR SUBSIDIARY GUARANTORS
<TABLE>
<CAPTION>
SUBSIDIARY GUARANTOR RATIO
- ---------------------------------------------------------------------------- ---------
<S> <C>
ASC......................................................................... 7.47
Piedmont.................................................................... 2.20
Kolmar-US Operations........................................................ 14.00
</TABLE>
F-11
<PAGE>
CONDENSED COMBINED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 27,
1998 (UNAUDITED)
(DOLLARS IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
SUBSIDIARY GUARANTORS
-------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASC AND KOLMAR-US COMBINED CONSOLIDATED
PIEDMONT OPERATIONS GUARANTORS NONGUARANTORS OSG ELIMINATIONS TOTAL
----------- ----------- ----------- -------------- --------- ------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss) from continuing
operations..................... $ 695 $ 2,246 $ 2,941 $ (447) $ (4,743) $ -- $ (2,249)
Total adjustments to reconcile
net income (loss) from
continuing operations to net
cash provided by (used in)
operating activities........... (2,589) (96,157) (98,746) 3,318 92,163 (3,265)
----------- ----------- ----------- -------------- --------- ------------ ------------
Net cash provided by (used in)
operating activities........... (1,894) (93,911) (95,805) 2,871 87,420 (5,514)
CASH FLOWS FROM INVESTING
ACTIVITIES
Capital expenditures............. (414) (194) (608) (321) (929)
Sale of property, plant or
equipment, net of gain......... 41 41 41
Acquisition of Kolmar
Laboratories, net of cash...... (77,951) (77,951)
Other............................ (1,180) (1,180) (1,180)
----------- ----------- ----------- -------------- --------- ------------ ------------
Net cash used in investing
activities..................... (373) (1,374) (1,747) (321) (77,951) (80,019)
CASH FLOWS FROM FINANCING
ACTIVITIES
Net repayments on revolving
loans.......................... (8,863) (8,863) (8,863)
Borrowing on senior subordinated
notes.......................... 105,000 105,000
Borrowing on senior bridge
loans.......................... 70,000 70,000
Repayments on senior term
loans.......................... (19,750) (19,750) (19,750)
Repayments of senior bridge
loans.......................... (70,000) (70,000)
Repayments of senior subordinated
debt........................... (6,000) (6,000)
Payment of debt due to
affiliate...................... (2,232) (2,232)
Proceeds from notes payable...... 250 250 250
Payment of dividends on preferred
stock.......................... (9) (9)
Proceeds from the issuance of
common stock................... 20,930 20,930
Capital infusion from parent..... 31,551 97,839 129,390 (129,390)
----------- ----------- ----------- -------------- --------- ------------ ------------
Net cash provided by (used in)
financing activities........... 2,938 98,089 101,027 (2,232) (9,469) 89,326
Net increase in cash and cash
equivalents.................... 671 2,804 3,475 318 3,793
Cash and cash equivalents at
beginning of year.............. 338 338 338
----------- ----------- ----------- -------------- --------- ------------ ------------
Cash and cash equivalents at end
of year........................ $ 1,009 $ 2,804 $ 3,813 $ 318 $ 4,131
----------- ----------- ----------- -------------- --------- ------------ ------------
----------- ----------- ----------- -------------- --------- ------------ ------------
</TABLE>
F-12
<PAGE>
CONDENSED COMBINED BALANCE SHEET AT JUNE 29, 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY GUARANTORS
--------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASC AND KOLMAR--US COMBINED CONSOLIDATED
PIEDMONT OPERATIONS GUARANTORS NONGUARANTORS OSG ELIMINATIONS TOTAL
----------- ------------ ----------- --------------- --------- ------------ ------------
ASSETS:
Current Assets
Cash............................ $ 467 $ 1,122 $ 1,589 $ 5,956 $ 7,545
Short term investments.......... 350 350 350
Accounts Receivable, net........ 13,828 13,248 27,076 5,408 32,484
Other receivables............... 668 2,813 3,481 229 (2,725 ) 985
Inventories..................... 12,399 9,378 21,777 6,244 28,021
Prepaid expenses and other
current assets................ 1,034 478 1,512 383 1,895
----------- ------------ ----------- ------- --------- ------------ ------------
Total Current Assets............ 28,746 27,039 55,785 18,220 (2,725 ) 71,280
Property and equipment, net..... 9,777 13,812 23,589 5,064 (140 ) 28,513
Goodwill, net................... 9,162 3,795 12,957 12,957
Intercompany receivable
(payable)..................... 4,349 4,349 (4,349 )
Investment in subsidiaries...... 9,476 9,476 22,090 (31,566 )
Other long- term assets......... 2,072 364 2,436 2,436
----------- ------------ ----------- ------- --------- ------------ ------------
Total Assets.................... $ 49,757 $ 58,835 $ 108,592 $ 23,284 $ 22,090 $ (38,780 ) $ 115,186
----------- ------------ ----------- ------- --------- ------------ ------------
----------- ------------ ----------- ------- --------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable................ $ 12,278 $ 5,741 $ 18,019 $ 3,228 $ 21,247
Other payables.................. 35,266 35,266 1,635 36,901
Accrued liabilities............. 2,077 3,319 5,396 1,983 (2,994 ) 4,385
Current portion of long-term
debt.......................... 1,500 41 1,541 2,412 3,953
----------- ------------ ----------- ------- --------- ------------ ------------
Total current liabilites........ 15,855 44,367 60,222 9,258 (2,994 ) 66,486
Long-term debt, less current
portion....................... 28,012 20,305 48,317 4,295 6,000 (4,295 ) 54,317
Other liabilities............... 485 15,303 15,788 184 (243 ) 15,729
----------- ------------ ----------- ------- --------- ------------ ------------
Total Liabilities............... 44,352 79,975 124,327 13,737 6,000 (7,532 ) 136,532
Redeemable Preferred Stock...... 4,379 4,379
Stockholders' Equity
(Deficit)..................... 5,405 (21,140 ) (15,735 ) 9,547 11,711 (31,248 ) (25,725 )
----------- ------------ ----------- ------- --------- ------------ ------------
Total Liabilities and
Stockholders' Equity.......... $ 49,757 $ 58,835 $ 108,592 $ 23,284 $ 22,090 $ (38,780 ) $ 115,186
----------- ------------ ----------- ------- --------- ------------ ------------
----------- ------------ ----------- ------- --------- ------------ ------------
</TABLE>
F-13
<PAGE>
CONDENSED COMBINED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 29, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY GUARANTORS
---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASC AND KOLMAR--US COMBINED CONSOLIDATED
PIEDMONT OPERATIONS GUARANTORS NONGUARANTORS OSG ELIMINATIONS TOTAL
----------- ------------- ----------- --------------- --------- --------------- ------------
Net Revenues................... $ 51,776 $ 37,557 $ 89,333 $ 16,489 $ 105,822
Cost of Goods Sold............. 44,426 30,807 75,233 14,550 89,783
----------- ------------- ----------- ------- --------- --- ------------
Gross Profit................... 7,350 6,750 14,100 1,939 16,039
Selling, General and
Administrative Expense....... 5,224 3,262 8,486 959 (17) 9,428
----------- ------------- ----------- ------- --------- --- ------------
Income from Operations......... 2,126 3,488 5,614 980 17 6,611
Interest Expense, net.......... (2,354) (1,799) (4,153) (248) (4,401)
----------- ------------- ----------- ------- --------- --- ------------
Income (Loss) Before Provision
for Income Taxes............. (228) 1,689 1,461 732 17 2,210
Provision For Income Taxes..... 84 210 294 (2) 292
----------- ------------- ----------- ------- --------- --- ------------
Income (Loss) Before
Extraordinary Item........... (312) 1,479 1,167 734 17 1,918
Extraordinary Item--Loss on
Early Extinguishment of
Debt......................... (1,060) (1,060) (1,060)
----------- ------------- ----------- ------- --------- --- ------------
Net (Loss) Income.............. $ (1,372) $ 1,479 $ 107 $ 734 $ -- $ 17 $ 858
----------- ------------- ----------- ------- --------- --- ------------
----------- ------------- ----------- ------- --------- --- ------------
</TABLE>
RATIO OF EARNINGS TO FIXED CHARGES FOR SUBSIDIARY GUARANTORS
<TABLE>
<CAPTION>
SUBSIDIARY GUARANTOR RATIO
- ----------------------------------------------------------------------------- ---------
<S> <C>
ASC.......................................................................... .86
Piedmont..................................................................... 1.00
Kolmar-US Operations......................................................... 1.87
</TABLE>
F-14
<PAGE>
CONDENSED COMBINED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 29,
1997 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY GUARANTORS
---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASC AND KOLMAR--US COMBINED
PIEDMONT OPERATIONS GUARANTORS NONGUARANTORS OSG ELIMINATIONS
----------- ------------- ----------- --------------- --------- ---------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income(loss) from continuing
operations.................... $ (1,372) $ 1,479 $ 107 $ 734 $ 17
Total adjustments to reconcile
net income (loss) from
continuing operations to net
cash provided by (used in)
operating activities.......... 6,411 (333) 6,078 989 (17)
----------- ------ ----------- ------ --------- ---
Net cash provided by operating
activities.................... 5,039 1,146 6,185 1,723
CASH FLOWS FROM INVESTING
ACTIVITIES
Capital expenditures............ (542) (738) (1,280) (419)
CASH FLOWS FROM FINANCING
ACTIVITIES
Deferred financing
acquisition................... (1,099) (1,099)
Net repayments on revolving
loan.......................... (3,191) (3,191)
----------- ------ ----------- ------ --------- ---
Net cash used in financing
activities.................... (4,290) (4,290)
----------- ------ ----------- ------ --------- ---
Net increase in cash and cash
equivalents................... 207 408 615 1,304
Cash and cash equivalents at
beginning of year............. 260 714 974 4,652
----------- ------ ----------- ------ --------- ---
Cash and cash equivalents at end
of year....................... $ 467 $ 1,122 $ 1,589 $ 5,956
----------- ------ ----------- ------ --------- ---
----------- ------ ----------- ------ --------- ---
<CAPTION>
<S> <C>
CONSOLIDATED
TOTAL
-------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income(loss) from continuing
operations.................... $ 858
Total adjustments to reconcile
net income (loss) from
continuing operations to net
cash provided by (used in)
operating activities.......... 7,050
-------------
Net cash provided by operating
activities.................... 7,908
CASH FLOWS FROM INVESTING
ACTIVITIES
Capital expenditures............ (1,699)
CASH FLOWS FROM FINANCING
ACTIVITIES
Deferred financing
acquisition................... (1,099)
Net repayments on revolving
loan.......................... (3,191)
-------------
Net cash used in financing
activities.................... (4,290)
-------------
Net increase in cash and cash
equivalents................... 1,919
Cash and cash equivalents at
beginning of year............. 5,626
-------------
Cash and cash equivalents at end
of year....................... $ 7,545
-------------
-------------
</TABLE>
F-15
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Outsourcing Services Group, Inc.
City of Industry, California
We have audited the accompanying consolidated balance sheets of Outsourcing
Services Group, Inc. (the Company or OSG) as of December 31, 1996 and 1997, and
the related consolidated statements of operations, stockholders' deficit and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on the 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 consolidated financial statements present fairly, in all
material respects, the financial position of Outsourcing Services Group, Inc. as
of December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
During the year ended December 31, 1996, the Company changed its method of
evaluating the recoverability of intangible assets.
Deloitte & Touche LLP
Costa Mesa, California
March 3, 1998
F-16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Outsourcing Services Group, Inc. and subsidiary
City of Industry, California
We have audited the accompanying consolidated statements of operations,
stockholders' deficit, and cash flows of Outsourcing Services Group Inc. and
subsidiary (the "Company") for the year ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit 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
misstatements. 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of the Company for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Newport Beach, California
February 23, 1996
F-17
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash........................................................................................ $ 260 $ 338
Short-term investment....................................................................... 350 250
Trade accounts receivable, net (Note 3)..................................................... 16,415 17,319
Other receivables........................................................................... 45 330
Income taxes receivable..................................................................... 143
Inventories, net (Note 4)................................................................... 10,143 12,125
Prepaid expenses............................................................................ 241 174
Deferred income taxes (Note 7).............................................................. 883 376
--------- ---------
Total current assets...................................................................... 28,480 30,912
PROPERTY AND EQUIPMENT, net (Note 5).......................................................... 10,091 10,188
DEPOSITS AND OTHER ASSETS..................................................................... 145 98
DEFERRED INCOME TAXES (Note 7)................................................................ 493 1,014
GOODWILL, net................................................................................. 9,921 7,857
OTHER INTANGIBLE ASSETS, net (Note 6)......................................................... 3,221 1,772
--------- ---------
$ 52,351 $ 51,841
--------- ---------
--------- ---------
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Trade accounts payable...................................................................... $ 10,387 $ 13,349
Current maturities of long-term debt (Note 8)............................................... 2,688 1,600
Accrued payroll and other compensation...................................................... 825 1,269
Accrued interest............................................................................ 141 235
Accrued property taxes...................................................................... 333 305
Refundable trade discount................................................................... 29 649
Other liabilities........................................................................... 651 910
--------- ---------
Total current liabilities................................................................. 15,054 18,317
DEFERRED TAXES (Note 7)....................................................................... 503
LONG-TERM DEBT (Note 8)....................................................................... 36,016 34,591
--------- ---------
Total liabilities......................................................................... 51,573 52,908
REDEEMABLE PREFERRED STOCK, $.001 par value; 30,000 shares authorized, issued and outstanding
as of December 31, 1996 (Note 9)............................................................ 4,118
REDEEMABLE SERIES A PREFERRED STOCK, $.001 par value; 3,750 shares authorized, issued and
outstanding (Note 9)........................................................................ 375
REDEEMABLE SERIES B PREFERRED STOCK, $.001 par value; 26,250 shares authorized, issued and
outstanding (Note 9)........................................................................ 3,884
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' DEFICIT:
Common stock, $.001 par value; 2,000,000 shares authorized; 1,329,842 and 1,267,174 shares
issued and outstanding as of December 31, 1996 and 1997, respectively..................... 1 1
Common stock warrants (Notes 8 and 10)...................................................... 193 828
Additional paid-in capital.................................................................. 13,297 12,662
Accumulated deficit......................................................................... (7,116) (9,102)
--------- ---------
6,375 4,389
Less predecessor carryover basis adjustment................................................. (9,715) (9,715)
--------- ---------
Total stockholders' deficit............................................................... (3,340) (5,326)
--------- ---------
$ 52,351 $ 51,841
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated financial statements.
F-18
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ------------
<S> <C> <C> <C>
NET REVENUES............................................................... $ 60,633 $ 79,832 $ 110,328
COST OF GOODS SOLD......................................................... 52,375 68,748 95,211
---------- ---------- ------------
GROSS PROFIT............................................................... 8,258 11,084 15,117
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................................................. 4,608 5,995 10,784
---------- ---------- ------------
INCOME FROM OPERATIONS..................................................... 3,650 5,089 4,333
INTEREST EXPENSE, net...................................................... (3,689) (3,646) (4,221)
OTHER INCOME, net.......................................................... 131
---------- ---------- ------------
INCOME BEFORE INCOME TAX PROVISION, EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE............................... 92 1,443 112
PROVISION FOR INCOME TAXES (Note 7)........................................ 40 690 568
---------- ---------- ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE.................................................. 52 753 (456)
EXTRAORDINARY ITEM, LOSS FROM EARLY EXTINGUISHMENT OF DEBT, net of income
tax benefit of $633 (Note 8)............................................. (1,060)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (Note 2)............. (7,000)
---------- ---------- ------------
NET INCOME (LOSS).......................................................... $ 52 $ (6,247) $ (1,516)
---------- ---------- ------------
---------- ---------- ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE PER SHARE........................................ $ 0.11 $ 1.09 $ (0.35)
LOSS AFTER EXTRAORDINARY ITEM PER SHARE.................................... $ -- $ -- $ (0.82)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE PER SHARE............ -- (10.15) --
---------- ---------- ------------
NET INCOME (LOSS) PER SHARE--Basic and diluted............................. $ 0.11 $ (9.06) $ (1.17)
---------- ---------- ------------
---------- ---------- ------------
WEIGHTED AVERAGE COMMON SHARES--Basic and diluted.......................... 471,616 689,806 1,298,508
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
See notes to consolidated financial statements.
F-19
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR
COMMON STOCK COMMON ADDITIONAL CARRYOVER TOTAL
---------------------- STOCK PAID-IN ACCUMULATED BASIS STOCKHOLDERS'
SHARES AMOUNT WARRANTS CAPITAL DEFICIT ADJUSTMENT DEFICIT
--------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1995......... 471,166 $ -- $ 193 $ 6,228 $ (7) $ (9,715) $ (3,301)
Sale of stock for cash........... 5,295 70 70
Accretion of redeemable preferred
stock.......................... (429) (429)
Net income....................... 52 52
--------- ----- ----- ----------- ------------- ----------- -------------
BALANCE, December 31, 1995....... 476,461 193 6,298 (384) (9,715) (3,608)
Accretion of redeemable preferred
stock.......................... (485) (485)
Issuance of common stock in
conjunction with the
acquisition of Piedmont........ 853,381 1 6,999 7,000
Net loss......................... (6,247) (6,247)
--------- ----- ----- ----------- ------------- ----------- -------------
BALANCE, December 31, 1996....... 1,329,842 1 193 13,297 (7,116) (9,715) (3,340)
Cancelation of common stock
warrants....................... (193) 193
Accretion of redeemable preferred
stock.......................... (141) (141)
Exchange of common stock for
warrants....................... (62,668) 828 (828)
Payment of dividends............. (329) (329)
Net loss......................... (1,516) (1,516)
--------- ----- ----- ----------- ------------- ----------- -------------
BALANCE, December 31, 1997....... 1,267,174 $ 1 $ 828 $ 12,662 $ (9,102) $ (9,715) $ (5,326)
--------- ----- ----- ----------- ------------- ----------- -------------
--------- ----- ----- ----------- ------------- ----------- -------------
</TABLE>
See notes to consolidated financial statements.
F-20
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
--------- ---------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................................ $ 52 $ (6,247) $ (1,516)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization.................................................. 1,880 2,495 4,218
Amortization of deferred financing costs....................................... 367 395 339
Provision for doubtful accounts................................................ 58 (43)
Cumulative effect of a change in accounting principle (Note 2)................. 7,000
Extraordinary item--write-off of deferred financing costs (Note 8)............. 1,693
Deferred income taxes.......................................................... 172 228 (517)
Benefit applied to reduce goodwill (Note 7).................................... 394 394
Change in operating assets and liabilities, net of effects of Piedmont
acquisition:
Notes receivable............................................................. 2,125
Trade accounts receivable.................................................... (2,523) (2,945) (861)
Inventories.................................................................. (883) (973) (1,982)
Prepaid expenses and other current assets.................................... 204 (233) (75)
Deposits and other assets.................................................... 13 87 47
Trade accounts payable....................................................... 2,252 (1,889) 2,962
Accrued expenses and other liabilities....................................... (153) (41) 1,389
--------- ---------- ---------
Net cash provided by operating activities.................................. 1,381 454 6,048
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................................. (429) (638) (1,486)
Acquisition of Piedmont, net of cash acquired.................................... (14,060)
Purchase of short-term investment................................................ (350)
Sale of short-term investment.................................................... 100
Intangible assets acquired....................................................... (19) -- --
--------- ---------- ---------
Net cash used in investing activities...................................... (448) (15,048) (1,386)
</TABLE>
See notes to consolidated financial statments.
F-21
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
--------- ---------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing acquisition................................................... -- -- (1,742)
Net (repayments) borrowings on revolving loans................................... (215) 6,315 (2,075)
Net payments on line of credit................................................... (290)
Borrowings on senior term loans.................................................. 5,000 20,500
Repayments of long-term debt..................................................... (1,125) (3,203) (20,938)
Payment of dividends on preferred stock.......................................... (329)
Proceeds from the issuance of common stock....................................... 70 7,000
Increase in bond overdraft....................................................... 365
--------- ---------- ---------
Net cash (used in) provided by financing activities........................ (905) 14,822 (4,584)
--------- ---------- ---------
NET INCREASE IN CASH............................................................. 28 228 78
CASH, beginning of year.......................................................... 4 32 260
--------- ---------- ---------
CASH, end of year................................................................ $ 32 $ 260 $ 338
--------- ---------- ---------
--------- ---------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION--Cash paid during the year for:
Interest..................................................................... $ 3,836 $ 3,312 $ 3,609
--------- ---------- ---------
--------- ---------- ---------
Income taxes................................................................. $ 2 $ 172 $ 126
--------- ---------- ---------
--------- ---------- ---------
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS--
Accretion attributable to preferred stock (Note 9)............................. $ 429 $ 485 $ 141
--------- ---------- ---------
--------- ---------- ---------
The Company acquired all the capital stock of Piedmont Laboratories, Inc. In
conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired.................................................. $ 13,919
Intangible assets acquired..................................................... 6,753
Cash paid for capital stock.................................................... (14,060)
----------
Liabilities assumed............................................................ $ 6,612
----------
----------
</TABLE>
See notes to consolidated financial statements.
F-22
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1. ORGANIZATION AND BACKGROUND
BUSINESS--Outsourcing Services Group, Inc. (the Company or OSG) is a leading
provider of outsourced manufacturing and packaging services to the health and
beauty aid, household and automotive consumer product markets in North America.
OSG primarily manufactures and/or packages health and beauty aid products,
including skin care creams and lotions, hair spray and gel, hair mousse,
shampoo, and shaving cream and gel. Other products manufactured and packaged by
the Company include household and automotive products, such as lubricants, tire
sealers, cleaners and lighter fluid. OSG offers its customers a complete range
of services, including product development, formulation, blending,
manufacturing, filling and packaging. It also provides ancillary services such
as materials procurement, warehousing and distribution of finished goods.
FORMATION--The Company was established as a result of the merger of Aerosol
Services Holding Corporation (ASHC) and Aerosol Companies Holding Corporation
(ACHC) in a transaction accounted for similar to a pooling of interest. Such
accounting treatment is in accordance with Interpretation No. 39 of APB Opinion
16 and is appropriate for entities under common control and results in the
combined assets and liabilities for both entities being recorded at their
historical cost.
ASHC was formed by an investor group to acquire Aerosol Services Company,
Inc. (ASC), effective February 14, 1994, for approximately $35,000,000. The
purchase price was financed primarily through the issuance of debt and equity
securities. ACHC was formed by essentially the same investor group plus
management of Piedmont Laboratories, Inc. (Piedmont) to acquire Piedmont on
October 1, 1996 for approximately $14,060,000. The purchase price was financed
primarily through the issuance of debt and equity securities. The acquisition
has been accounted for as a purchase for accounting purposes and, accordingly,
the assets acquired and liabilities assumed have been recorded at their
estimated fair values at the date of acquisition. The excess of the purchase
price over the fair value of the net assets acquired was $5,754,000 and has been
recorded as goodwill. Other intangible assets arising from this transaction
amounted to $999,000. Assuming the Piedmont acquisition had occurred on January
1, 1996, pro forma net revenues and net loss for OSG for the year ended December
31, 1996 would have been approximately $107,708,000 and $(5,296,000),
respectively.
MERGER--Under the terms of the merger, effective June 30, 1997, ACHC was
merged into ASHC at which time, ASHC was renamed Outsourcing Services Group,
Inc. As a result of this merger, the Company became the sole common stockholder
of ASC and Piedmont. The merger agreement also amended the capital structure
such that the existing stockholders of ACHC received approximately 1.22 new
shares of the Company's common stock for each old share of ACHC common stock
that they owned prior to the merger and the existing stockholders of ASHC
received approximately .76 new shares of the Company's common stock for each old
share of ASHC common stock that they owned prior to the merger. In addition, the
outstanding preferred stock was canceled and new shares of preferred stock were
issued in the form of a Series A preferred stock and Series B preferred stock
(Note 9).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries, Aerosol Services
Company, Inc. and Piedmont Laboratories, Inc. subsequent to its acquisition on
October 1, 1996. All significant intercompany transactions have been eliminated.
F-23
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION--OSG's financial statements give retroactive effect to
the formation of OSG and to the acquisition of Piedmont as if it was acquired by
OSG on October 1, 1996.
SHORT-TERM INVESTMENT--Short-term investment consists of a certificate of
deposit with an original maturity of greater than three months and a remaining
maturity of less than one year. Short-term investment is stated at cost which
approximates market value.
INVENTORIES--Inventories are valued at the lower of cost or market using the
first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation and amortization are
provided principally using the straight-line method over the estimated useful
lives of the related assets ranging from 3 to 20 years. Expenditures for major
renewals and betterments are capitalized, while minor replacements, maintenance
and repairs which do not extend the asset lives are charged to operations as
incurred.
OTHER INTANGIBLE ASSETS--Other intangible assets which include organization
and other costs are being amortized on a straight-line basis over a 60-month
period.
DEFERRED FINANCING COSTS--Deferred financing costs are capitalized costs
associated with obtaining long-term debt financing including legal expenses,
bank fees and seller's costs. These costs are being amortized over the repayment
term of the related debt using the effective interest method.
GOODWILL--Goodwill represents the excess of the purchase price over the fair
value of the net assets of ASC and Piedmont and is amortized on a straight-line
basis over five years. The Company subjects the carrying value of the goodwill
to an annual review for impairment. Effective January 1, 1996, the Company
changed its accounting policy for evaluating the recoverability of intangible
assets. Previously, the Company determined the recoverability of intangible
assets by considering estimated future operating income of the Company on an
undiscounted cash flow basis. Under its new policy, the Company evaluates the
recoverability of intangible assets based on the estimated fair market value of
the Company. Management changed its accounting policy because it concluded that
a fair value approach was a better measure of the future benefit of goodwill.
The cumulative effect of the change in accounting policy has resulted in a
write-down of goodwill associated with the acquisition of ASC of $7,000,000.
Goodwill is presented net of accumulated amortization of $2,421,000 in 1996 and
$4,326,000 in 1997.
The fair value method will be applied to each of OSG's operating entities.
Management's estimate of fair value will primarily be based on multiples of
forecasted EBITDA. The multiples will be determined based upon publicly
available information regarding comparable publicly-traded companies in the
industry, but will also consider (i) the financial projections of each entity,
(ii) the future prospects of each entity, including its growth opportunities and
likely operational improvements, and (iii) comparable transaction prices, if
available. While management believes the estimation methods are reasonable and
reflective of common valuation practices, there can be no assurance that a sale
to a buyer for the estimated value ascribed to each entity could be completed.
Changes to the method of valuing operating entities will be made only when there
is a significant and fundamental change in facts and circumstances, such as
significant changes in market position or the entrance or exit of a significant
competitor from a regional market.
F-24
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OSG management will perform a review of each operating entity on an annual
basis (unless circumstances dictate that a review is needed in an interim
period) to determine if events or changes in circumstances were deemed to have
occurred which would have an impact on the fair value of the operating entity.
Should the estimated fair value of an operating entity be less than the carrying
value of its identifiable assets, the Company would record a charge to
operations to recognize an impairment of its intangible assets for such
difference.
PREDECESSOR CARRYOVER BASIS ADJUSTMENT--The assets and liabilities
attributed to the former stockholders of ASC, who retained a 33.63% interest in
ASHC, subsequent to the acquisition, were recorded at the predecessor basis in
accordance with generally accepted accounting principles. The assets and
liabilities attributed to the former stockholders were $14,652,155 and
$11,483,856, respectively. The new basis of reporting for the Company's net
assets using fair market values at the date of the acquisition was reduced by
$9,715,000 to reflect the carryover basis of the former stockholder of ASC. This
predecessor carryover basis adjustment is reflected as a reduction of
stockholders' equity. A corresponding adjustment was determined to be immaterial
for the acquisition of Piedmont.
LONG-LIVED ASSETS--The Company accounts for the impairment and disposition
of long-lived assets in accordance with Statement of Financial Accounting
Standards (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND
FOR LONG-LIVED ASSETS TO BE DISPOSED OF. In accordance with SFAS No. 121,
long-lived assets to be held are reviewed for events or changes in circumstances
which indicate that their carrying value may not be recoverable. The Company
periodically reviews the carrying value of long-lived assets to determine
whether or not an impairment to such value has occurred.
OVERDRAFT--As a result of cash management policies, the Company maintains
overdraft positions in certain cash accounts. Overdrafts at December 31, 1996
and 1997, which are included in accounts payable, were $1,162,000 and
$1,627,000, respectively.
REVENUE RECOGNITION--Revenue is generally recognized as products are shipped
to customers. When customers, under the terms of specific orders, request that
the Company manufacture and invoice goods on a bill and hold basis, the Company
recognizes revenue based on the completion of the manufacturing process. The
Company estimates and records provisions for sales returns and allowances based
on its experience. Total sales returns and allowances were $1,688,000,
$1,094,000 and $1,537,000 in 1995, 1996 and 1997, respectively.
INCOME TAXES--The Company accounts for income taxes under the provisions of
SFAS No. 109, ACCOUNTING FOR INCOME TAXES. Under this method, deferred income
taxes are recognized for the tax consequences in future years of differences
between the tax bases of assets and liabilities and their financial reporting
amounts at each year-end based on enacted tax laws and statutory rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized.
CONCENTRATION OF CREDIT RISK--Financial instruments which potentially expose
the Company to concentration of credit risk consist primarily of cash and trade
accounts receivable. The Company maintains cash balances with financial
institutions that are in excess of federally insured limits. The Company's
products are primarily sold to product marketers which, in turn, sell or
distribute to retail stores and salons. These customers can be affected by
changes in economic, competitive or other factors. The Company makes
F-25
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
substantial sales to relatively few, large customers. Credit limits, ongoing
credit evaluations, and account monitoring procedures are utilized to minimize
the risk of loss. Collateral is generally not required.
USE OF ESTIMATES AND ASSUMPTIONS--The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The Company's consolidated balance
sheets include the following financial instruments: short-term investment, trade
accounts receivable, trade accounts payable and long-term debt. The Company
considers the carrying amounts in the financial statements to approximate fair
value of these financial instruments due to the relatively short period of time
between the origination of the instruments and their expected realization or the
interest rates which approximate current market rates.
MAJOR CUSTOMERS--During fiscal years 1995, 1996 and 1997, two customers
accounted for approximately 49%, 38% and 35%, respectively, of revenues. A
decision by a significant customer to decrease the amount purchased from the
Company or to cease carrying the Company's products could have a material effect
on the Company's financial condition and results of operations.
RESEARCH AND DEVELOPMENT COSTS--Research and development costs are expensed
when incurred. Included in general and administrative expenses for the fiscal
years 1995, 1996 and 1997 is approximately $159,000, $191,000 and $298,000,
respectively, of research and development costs for the development and
improvement of the Company's products.
RECLASSIFICATIONS--Certain reclassifications have been made to the 1996
financial statements to conform with the 1997 presentation.
NET INCOME (LOSS) PER SHARE--The Company has adopted SFAS No. 128, EARNINGS
PER SHARE, which replaces the presentation of "primary" earnings per share with
"basic" earnings per share and the presentation of "fully diluted" earnings per
share with "diluted" earnings per share. All previously reported earnings per
share amounts have been restated based on the provisions of the new standard.
Basic earnings per share are based upon the weighted average number of common
shares outstanding. Diluted earnings per share amounts are based upon the
weighted average number of common and common equivalent shares for each period
presented. Common equivalent shares include stock options assuming conversion
under the treasury stock method. Diluted earnings per share have not been
presented in the accompanying financial statements because the effect was either
antidilutive or the same as basic earnings per share.
RECENTLY ISSUED ACCOUNTING STANDARDS--For fiscal year beginning after
December 15, 1997, the Company will adopt SFAS No. 130, REPORTING COMPREHENSIVE
INCOME, and SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION. The Company is reviewing the impact of such accounting
pronouncements on its financial statements.
F-26
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Trade accounts receivable............................................... $ 16,753 $ 17,528
Less allowance for doubtful accounts.................................... (338) (209)
--------- ---------
$ 16,415 $ 17,319
--------- ---------
--------- ---------
</TABLE>
4. INVENTORIES
Inventories consisted of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Raw materials........................................................... $ 8,430 $ 9,621
Finished goods.......................................................... 3,276 3,511
--------- ---------
11,706 13,132
Less reserve for excess and obsolete inventories........................ (1,563) (1,007)
--------- ---------
$ 10,143 $ 12,125
--------- ---------
--------- ---------
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Land.................................................................... $ 158 $ 158
Building................................................................ 2,227 2,230
Equipment............................................................... 9,062 9,716
Leasehold improvements.................................................. 131 345
Furniture and fixtures.................................................. 250 298
Construction in progress................................................ 332 819
Computer equipment...................................................... 396 476
--------- ---------
12,556 14,042
Less accumulated depreciation and amortization.......................... (2,465) (3,854)
--------- ---------
$ 10,091 $ 10,188
--------- ---------
--------- ---------
</TABLE>
F-27
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
6. OTHER INTANGIBLE ASSETS
Other intangible assets consisted of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Deferred financing costs................................................. $ 3,313 $ 1,111
Organizational costs..................................................... 1,520 1,537
Consolidation costs...................................................... 26
Other intangible assets.................................................. 236 259
Lease acquisition costs.................................................. 125 125
--------- ---------
5,194 3,058
Less accumulated amortization............................................ (1,973) (1,286)
--------- ---------
$ 3,221 $ 1,772
--------- ---------
--------- ---------
</TABLE>
7. INCOME TAXES
The provision for income taxes consists of the following for the years ended
December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal............................................................. $ -- $ 60 $ 188
State............................................................... 1 8 43
--------- --------- ---------
1 68 231
Deferred:
Federal............................................................. (74) 211 (74)
State............................................................... (281) 17 17
--------- --------- ---------
(355) 228 (57)
Benefit applied to reduce goodwill.................................... 394 394 394
--------- --------- ---------
Provision for income taxes............................................ $ 40 $ 690 $ 568
--------- --------- ---------
--------- --------- ---------
</TABLE>
A reconciliation between the provision for income taxes, as required by
applying the federal statutory rate of 35% to that included in the financial
statements, is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1995 1996 1997
------ --------- ----------
<S> <C> <C> <C>
Provision for income taxes at
federal statutory rate........... 35.0% 35.0% 35.0%
State income taxes, net of federal
benefit.......................... (160.4)% (2.7)% 56.8%
Change in valuation allowance...... 41.8% 4.9%
Goodwill........................... 125.1% 10.4% 362.2%
Meals and entertainment............ 16.2%
Officer's life insurance........... 12.8%
Other permanent differences........ 2.0% 0.2% 23.9%
------ --------- ----------
43.5% 47.8% 506.9%
------ --------- ----------
------ --------- ----------
</TABLE>
F-28
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
7. INCOME TAXES (CONTINUED)
Deferred taxes are recorded based upon the differences between the financial
statement and tax bases of assets and liabilities. Temporary differences which
give rise to deferred income tax assets and liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryover........................................... $ 951 $ 2,037
Allowance for doubtful accounts........................................ 144 90
Accrued liabilities.................................................... 164 250
Inventory capitalization............................................... 98 98
Inventory reserve...................................................... 476 226
Contamination reserve.................................................. 50 50
Goodwill............................................................... 3,193 3,066
Deferred acquisition costs............................................. 53 53
California manufacturer credits........................................ 79 92
Charitable contributions............................................... 28
AMT tax credits........................................................ 12
--------- ---------
Total gross deferred tax assets...................................... 5,220 5,990
Deferred tax liabilities:
Property and equipment................................................. (1,096) (1,321)
Franchise taxes........................................................ (102) (130)
AMT tax credits........................................................
--------- ---------
Total deferred tax liabilities....................................... (1,198) (1,451)
Valuation allowance...................................................... (3,149) (3,149)
--------- ---------
Net deferred tax assets.............................................. $ 873 $ 1,390
--------- ---------
--------- ---------
</TABLE>
At December 31, 1997, the Company had a federal net operating loss
carryforward of $5,625,000 that expires from 2010 through 2012 and a California
net operating loss carryforward of $1,341,000 that expires in 2002, except for
federal and California losses of approximately $900,000 and $414,000,
respectively. The federal and California loss carryforwards can only be utilized
by the subsidiary generating the losses. In addition, the Company has a
California manufacturer credit carryover of $92,000 that expires in 2004.
As a result of the purchase of ASC's assets, the purchase price assigned to
goodwill for tax purposes exceeded the goodwill recorded for financial reporting
by approximately $6,015,173 at December 31, 1997. The tax benefit of this excess
is being recognized when realized on the tax return by a corresponding reduction
to financial reporting goodwill as required by SFAS No. 109.
F-29
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
8. LONG-TERM DEBT
Long-term debt consists of the following as of December 31:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Senior term loan to a financial institution, principal due quarterly
plus interest through June 30, 2004................................... $ -- $ 19,750
Senior term loan to a financial institution, principal due quarterly
plus interest through February 14, 2001............................... 14,188 --
Senior revolving loans to financial institution with various
maturities............................................................ 12,516 10,441
Senior subordinated debt................................................ 12,000 6,000
--------- ---------
Total long-term debt................................................ 38,704 36,191
Current maturities...................................................... (2,688) (1,600)
--------- ---------
Long-term debt, net of current maturities............................... $ 36,016 $ 34,591
--------- ---------
--------- ---------
</TABLE>
SENIOR TERM LOAN--On June 30, 1997, the Company entered into a credit
agreement with a financial institution, in which it borrowed $11,000,000 under
Term Loan A and $9,500,000 under Term Loan B. As of December 31, 1997, the
Company had $19,750,000 outstanding under these term loans. The new financing
was used to pay down the existing senior term and senior revolving loans.
Deferred financing costs of $1,693,000 associated with such existing debt was
written off in 1997 and reflected as an extraordinary item in the accompanying
financial statements, net of tax. The term loans will be repaid with scheduled
quarterly installments of varying amounts through June 30, 2004. Amounts
borrowed under the term loans bear interest as follows: (a) if a base rate loan,
then at the sum of the base rate plus .75% per annum for Term Loan A and 1.25%
per annum for Term Loan B, and (b) if a LIBOR rate loan, then at the sum of the
LIBOR rate plus 3.0% per annum for Term Loan A and 3.5% per annum for Term Loan
B. The index rate is selected by the Company initially and may be changed from
time to time. As part of this credit agreement, this Company also obtained a
revolving loan described below.
All borrowings under the credit agreement are collateralized by
substantially all assets and capital stock of OSG. The agreement contains
covenants which, among other things, require OSG to achieve a specified level of
earnings and maintain a minimum interest coverage ratio. In addition, the
Company is restricted from paying dividends and selling certain assets. The
Company was in compliance with all covenants as of December 31, 1997.
As of December 31, 1996, the Company had a term loan of $9,187,500 payable
to a financial institution. Such loan was collateralized by substantially all
assets of Aerosol Services Company (ASC). The Company was required to make
scheduled quarterly installment payments of varying amounts through February 14,
2001. This loan bore interest at the prime rate plus 1.75% per annum (10% at
December 31, 1996).
On September 30, 1996, the Company entered into a loan agreement with a
financial institution. Such loan was collateralized by substantially all assets
of Piedmont. As of December 31, 1996, the balance on this loan was $5,000,000.
This loan bore interest as follows: (a) if a base rate loan, then at the sum of
the
F-30
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
8. LONG-TERM DEBT (CONTINUED)
base rate plus 1.0% per annum (9.25% at December 31, 1996); and (b) if a LIBOR
rate loan, then at the sum of the LIBOR rate plus 3.0% per annum (8.5% at
December 31, 1996). The index rate was selected by the Company initially at the
date of borrowing.
SENIOR REVOLVING LOANS--As of December 31, 1997, the Company had a senior
revolving loan for maximum borrowings of up to $18,000,000 based on 65% of
eligible inventory plus 85% of eligible accounts receivable. The balance on this
loan was $10,441,000 as of December 31, 1997. Amounts due under the revolving
loan bear interest as follows: (a) if a base rate loan, then at the sum of the
base rate plus .75% per annum; and (b) if a LIBOR rate loan, then at the sum of
the LIBOR rate plus 3.05 per annum.
As of December 31, 1996, the Company had a $12,000,000 revolving credit
facility available until February 14, 2001. Amounts borrowed under the credit
facility bore interest as follows: (a) if a base rate loan, then at the sum of
the base rate plus 1.75% per annum (10% at December 31, 1996); and (b) if a
LIBOR rate loan, then at the sum of the LIBOR rate plus 3.5% per annum (9% at
December 31, 1996). The index rate was selected by the Company initially at the
date of borrowing.
The Company also had a $5,000,000 revolving credit facility available until
October 1, 2001, which was collateralized by substantially all assets of
Piedmont. Amounts borrowed under the credit facility bore interest as follows:
(a) if a base rate loan, then at the sum of the base rate plus 0.5% per annum
(8.75% at December 31, 1996); and (b) if a LIBOR rate loan, then at the sum of
the LIBOR rate plus 2.5% per annum (8.0% at December 31, 1996). The index rate
was selected by the Company initially at the date of borrowing.
SENIOR SUBORDINATED DEBT--On January 30, 1997, amounts owed to London
Pacific Life were repaid in full. In addition, the warrants to purchase 19,263
shares of common stock issued with the debentures were canceled.
Effective June 30, 1997, the Company renegotiated its senior subordinated
debt of $6,000,000 owed to Chase Manhattan Bank. Under the terms of the new
agreement, the principal will be repaid in one lump sum on June 30, 2005. The
interest rate will remain at 12% per annum. The Company was in compliance with
all senior subordinated debt covenants as of December 31, 1997.
In conjunction with the June 30, 1997 financing, OSG exchanged 62,668 shares
of the Company's common stock for warrants held by its lender to purchase 80,883
shares of its common stock at a price of $0.01 per share, exercisable any time
after June 30, 2002. Such warrants were recorded at the fair market value of
$828,000 which approximates the value of the stock held by the lender at the
time of the exchange. The warrants expire on June 30, 2007. The Company may not
call the warrants prior to June 30, 2003. Thereafter, the Company may from time
to time call all of the outstanding warrants at a call price equal to the fair
market value of a share of common stock as of the call date less the exercise
price in effect on the date which the call price is paid.
As of December 31, 1996, the Company had senior subordinated debt which was
unsecured and consisted of term loans in the amount of $6,000,000 to London
Pacific Life and $6,000,000 to Chase Manhattan Bank, which bore interest at the
rate of 12% per annum.
F-31
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
8. LONG-TERM DEBT (CONTINUED)
REFINANCING--Subsequent to December 31, 1997, the Company refinanced all of
its existing indebtedness as part of the acquisition of Kolmar (Note 14).
9. REDEEMABLE PREFERRED STOCK
As of December 31, 1996, the Company had authorized and issued 30,000 shares
of Redeemable preferred stock with a par value of $.001 per share and a
liquidation preference of $100 per share, plus an amount equal to all accrued
and unpaid dividends. The holders of Redeemable preferred stock were entitled to
cumulative dividends at a rate of $2.50 per share, per quarter, accruing from
the date of issuance, payable quarterly. If current dividends were not declared
and paid with respect to any dividend payment date, then the holders of the
Redeemable preferred stock were entitled to receive an increased dividend in
cash equal to $3.25 per share for the first undeclared dividend. Subsequently,
the amount of the unpaid dividend shall increase by 2.5% or 3.25% of the
liquidation preference per quarter, depending on whether subsequent dividend
payments were made.
Upon the merger of ASHC and ACHC (Note 1), the Redeemable preferred stock
discussed in the preceding paragraph was canceled and 3,750 shares of Series A
and 26,250 shares of Series B Redeemable preferred stock were issued to the
holders of the canceled shares, with a par value of $.001 per share.
The holders of Series A preferred stock are entitled to noncumulative
dividends at a rate of $2.50 per share, per quarter, accruing from the date of
issuance, payable quarterly. If current dividends are not declared and paid with
respect to any dividend payment date, then the holders of the Series A preferred
stock are entitled to receive an increased cumulative dividend in cash equal to
$3.25 per share for the first dividend period for which a dividend was not
declared. Subsequently, the amount of the unpaid dividend shall increase by 2.5%
or 3.25% of the liquidation preference per quarter, depending on whether
subsequent dividend payments are made. The holders of Series B preferred stock
are entitled to cumulative dividends at a rate of $2.00 per share, per quarter,
accruing from June 30, 1997, payable quarterly. The Series B dividends shall
accrue and be cumulative whether or not they have been declared.
At any time after June 30, 2000, the Company may, at the option of the Board
of Directors, redeem all or part of the outstanding shares of the Series A and
Series B preferred stock at a redemption price of $100.00 and $145.97 per share,
respectively, plus an amount equal to all accrued and unpaid dividends. The
Company is required to redeem all outstanding shares on the earlier of June 30,
2006, an initial public offering of the Company's common stock or a liquidation,
dissolution or winding up of the Company. Holders of Series A and Series B
preferred stock have a liquidation preference of $100.00 and $145.97 per share,
respectively, plus an amount equal to all accrued and unpaid dividends. Except
as required by law, the holders of Series A and Series B preferred stock are not
entitled to vote on any matters.
As of December 31, 1996 and 1997, cumulative and undeclared dividends in
arrears amounted to $1,118,000 and $53,000, respectively. The accrued dividends
are being accreted annually as an increase to the value of the preferred stock
and a reduction in retained earnings.
10. COMMON STOCK WARRANTS
On February 14, 1994, in connection with obtaining the subordinated debt
discussed in Note 8, 1,000 common stock warrants were issued which were
initially exercisable for 19,263 shares of common stock of the Company at a
price of $0.01 per share, exercisable any time after issuance and subject to an
anti-
F-32
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
10. COMMON STOCK WARRANTS (CONTINUED)
dilution adjustment. On January 30, 1997, in conjunction with the repayment of
the subordinated debenture (Note 8), these warrants were canceled.
As discussed in Note 8, OSG issued warrants to a lender to purchase 80,883
shares of its common stock at a price of $0.01 per share.
11. RELATED-PARTY TRANSACTIONS
The Company leases its plant facility, two adjacent warehouses and land from
stockholders of the Company and from a partnership of three of the Company's
stockholders. Lease payments for these facilities and land leases were $882,000,
$882,000 and $895,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
Various manufacturing and data processing equipment is also leased from a
partnership of two of the Company's stockholders. Lease payments for these
equipment leases for the years ended December 31, 1995, 1996 and 1997 were
$139,000, $106,000 and $106,000, respectively.
The Company recorded sales to affiliated companies, which are wholly-owned
by two of the Company's stockholders, for the years ended December 31, 1995,
1996 and 1997 in the amount of $100,000, $119,000 and $243,000, respectively. At
December 31, 1995, 1996 and 1997, the Company had $47,000, $41,000 and $163,000,
respectively, in affiliated company accounts receivable, which are included in
trade accounts receivable.
The Company has a management agreement with a stockholder for managing
operations of OSG. Such management fees were $100,000, $119,000 and $175,000 for
the years ended December 31, 1995, 1996 and 1997, respectively.
12. PROFIT-SHARING PLANS
The Company has profit-sharing plans for employees of ASC and Piedmont.
Contributions to the plan are at the discretion of the Board of Directors.
During December 31, 1995, 1996 and 1997, the Company contributed $50,000,
$59,000 and $85,000 to these plans.
13. COMMITMENTS AND CONTINGENCIES
LEASES--The Company leases warehouse and office space under operating
leases. Each lease is subject to an upward annual rental adjustment based upon
the percentage change in the Consumer Price Index. The Company is responsible
for insurance and property taxes on the facilities.
The Company has equipment under operating leases having terms from 3 to 10
years.
Total rent expense on operating leases for the years ended December 31,
1995, 1996 and 1997 was $1,027,000, $1,134,000 and $1,383,000, respectively.
F-33
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Minimum annual rentals and lease payments in the aggregate are:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
- -------------------------------------------------------------------------------
<S> <C>
1998......................................................................... $ 1,407,000
1999......................................................................... 1,156,000
2000......................................................................... 987,000
2001......................................................................... 936,000
2002......................................................................... 910,000
Thereafter................................................................... 7,537,000
-------------
$ 12,933,000
-------------
-------------
</TABLE>
SELF-INSURANCE PROGRAMS--The Company participates in a self-insured group
health program for employees of Piedmont, whereby the first $50,000 of claims
for each employee will be paid by the Company. The Company also participates in
a self-insured workers' compensation program for employees of Piedmont, whereby
the Company will pay the first $100,000 per claim. The Company has accrued
$100,000 and $279,000 as of December 31, 1996 and 1997, respectively, for unpaid
claims.
PRODUCT LIABILITY INSURANCE--The Company maintains product liability
insurance which provides coverage in the amount of $51 million per occurrence
(above a $25,000 per occurrence self-insured retention) and $52 million in the
aggregate (above a $250,000 annual aggregate self-insured retention). A product
liability claim that results in a judgment or settlement in excess of the
Company's insurance coverage could have a material adverse effect on the
Company's business, results of operations or financial condition.
ENVIRONMENTAL REGULATION AND COMPLIANCE--The Company's operations and
properties are subject to extensive federal, state, local and foreign
environmental laws and regulations concerning, among other things, emissions to
air, discharges to water, the remediation of contaminated soil and groundwater,
and the generation, handling, storage, transportation, treatment and disposal of
waste and other materials (collectively, the Environmental Laws). Based upon the
Company's experience to date, as well as certain indemnification agreements
obtained in connection with the Company's acquisitions, the Company believes
that the future cost of compliance with existing Environmental Laws and its
liability for identified environmental claims will not have a material adverse
effect on the Company's business, results of operations or financial condition.
EMPLOYEE AGREEMENTS--Effective December 31, 1997, the Company terminated the
employment of two shareholders upon the closing of the Kolmar Acquisition (Note
14). The shareholders will receive lump sum payments totaling $553,700, plus
benefits.
MANAGEMENT SERVICE AGREEMENTS--Pursuant to a Management Services Agreement
with The Gordon+Morris Group (G+MG), the Company paid G+MG $800,000 upon closing
of the Kolmar Acquisition and will pay G+MG, in exchange for management
services, (i) an annual fee of $350,000, which is subject to adjustment, and
(ii) up to 2% of the total consideration received or paid in various
transactions. The Company is also a party to a letter agreement with HarbourVest
Partners, LLC (HV), pursuant to which the Company will pay HV, in exchange for
financial and business advisory services, (i) an annual fee of $115,000 and (ii)
1/3 of the fee, under certain conditions, received by G+MG under its Management
Services Agreement with the Company.
F-34
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
14. SUBSEQUENT EVENTS
As of January 1, 1998, the Company acquired from CCL Industries, all of the
outstanding shares of Kolmar Laboratories, Inc. and the net assets of Kolmar
Canada Inc., (collectively referred to as the Kolmar Group) for $78.0 million,
subject to certain post-closing adjustments. The acquisition has been treated as
a purchase for accounting purposes. Accordingly, the assets acquired and
liabilities assumed have been recorded at their estimated fair values at the
date of acquisition. Assuming the Kolmar Group acquisition had occurred on
January 1, 1997, pro forma net revenue and net loss for OSG for the year ended
December 31, 1997 would have been approximately $213,090,000 and $847,000,
respectively.
The Kolmar Group designs, manufactures, contracts for manufacture and sells
a variety of cosmetics, creams and lotions, and fragrances to retailers and
wholesale distributors principally in the United States, Canada, Mexico and
Australia.
In conjunction with the Kolmar Group acquisition, the Company refinanced all
of its existing indebtedness. Deferred financing costs of $1,111,000 associated
with this indebtedness was written off. The purchase price and the repayment of
existing debt, plus $7.4 million of related fees and expenses were financed
through $30.0 million of borrowings under a senior secured credit facility,
$70.0 million of borrowings under a senior subordinated credit agreement, and
the issuance of 2.093 million shares of the Company's common stock to existing
shareholders of the Company. Loans under the senior secured credit facility and
the senior subordinated credit agreement bore interest at rates of approximately
9.25% and 11.6%, respectively.
On March 3, 1998, the Company repaid indebtedness incurred in conjunction
with the Kolmar Group acquisition, using the proceeds from the issuance of $105
million senior subordinated notes which are due in 2006. Interest on the notes
will accrue from their date of original issuance and will be payable semi-
annually in arrears on March 1 and September 1 of each year, commencing
September 1, 1998, at the rate of 10.875% per annum. The notes are redeemable in
whole or in part, at the option of the Company, on or after March 1, 2003 at the
redemption price of 110.875% of the aggregate principal amount to be redeemed
plus accrued and unpaid interest to the redemption date. In addition, at any
time on or prior to March 1, 2001, the Company, at its option, may redeem up to
35% of the aggregate principal amount of the notes originally issued with the
net cash proceeds of one or more equity offerings at the redemption price plus
accrued and unpaid interest to the redemption date; provided that at least 65%
of the aggregate principal amount of the notes originally issued remains
outstanding immediately after such redemption. The notes are unsecured senior
subordinated obligations of the Company and will be subordinated in right of
payment to all existing and future senior debt of the Company.
15. SUPPLEMENTAL GUARANTOR INFORMATION
The payment obligations of the Company under the Notes are to be guaranteed
by certain of the Company's wholly owned domestic subsidiaries ("Guarantors").
Such guarantees are full, unconditional and joint and several. Separate
financial statements of the Subsidiary Guarantors are not presented because the
Company's management has determined that they would not be material to
investors. The following financial information presents the audited condensed
combined balance sheets as of December 31, 1997 and 1996 and the unaudited
condensed combined balance sheets as of December 31, 1995, the audited condensed
combined statement of income and cash flows for the year ended December 31,
1997, and the unaudited condensed combined statements of income and cash flows
for the years ended December 31, 1996 and 1995 of the Guarantors, representing
Kolmar, ASC and Piedmont and the nonguarantors which consist of Kolmar Canada, a
division of CCL, Kolmar de Mexico S.A. de C.V. and
F-35
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
15. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
Kolmar (Aust.) Pty. Limited. The financial information is intended to provide
information for the Guarantor and nonguarantor operations of the Company, based
on amounts derived from the financial statements of the Company and of the
Kolmar Group, as of and for the periods presented.
The condensed combined Guarantor and nonguarantor financial information is
presented for informational purposes only and does not purport to represent the
combined financial position or results of operations of these entities as of the
date presented, or to project their financial condition or results of operations
for any future period or date. Each Guarantor is a wholly-owned subsidiary of
the Company and has fully and unconditionally guaranteed the Notes on a joint
and several basis. The Company has not presented separate financial statements
and other disclosures concerning the Guarantors because management has
determined that such information is not material to investors.
F-36
<PAGE>
CONDENSED COMBINED BALANCE SHEET AT DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY GUARANTORS
---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASC AND KOLMAR--US COMBINED CONSOLIDATED
PIEDMONT OPERATIONS GUARANTORS NONGUARANTORS OSG ELIMINATIONS TOTAL
----------- ------------- ----------- --------------- --------- ------------ ------------
ASSETS:
Current Assets
Cash....................... $ 338 $ 202 $ 540 $ 9,353 $ 9,893
Short term investments..... 250 250 250
Accounts Receivable, net... 17,319 12,659 29,978 5,024 35,002
Other receivables.......... 330 3,051 3,381 205 (2,759 ) 827
Inventories................ 12,125 8,826 20,951 3,805 24,756
Prepaid expenses and other
current assets........... 552 522 1,074 265 (2) 1,337
----------- ------------- ----------- ------- --------- ------------ ------------
Total Current Assets..... 30,914 25,260 56,174 18,652 (2) (2,759 ) 72,065
Property and equipment,
net........................ 10,188 14,741 24,929 4,511 29,440
Goodwill, net................ 7,856 3,472 11,328 11,328
Intercompany receivable
(payable).................. 2,662 2,662 (2,662 )
Investment in subsidiaries... 10,010 10,010 14,730 (24,740 )
Other long-term assets....... 2,885 8,977 11,862 11,862
----------- ------------- ----------- ------- --------- ------------ ------------
Total Assets............. $ 51,843 $ 65,122 $ 116,965 $ 23,163 $ 14,728 $ (30,161 ) $ 124,695
----------- ------------- ----------- ------- --------- ------------ ------------
----------- ------------- ----------- ------- --------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable............. $ 13,349 $ 6,941 $ 20,290 $ 1,958 $ 22,248
Other payables............... 33,438 33,438 4,179 37,617
Accrued liabilities.......... 3,288 2,463 5,751 1,189 80 (3,015 ) 4,005
Current portion of long-term
debt....................... 1,600 40 1,640 2,269 3,909
----------- ------------- ----------- ------- --------- ------------ ------------
Total current
liabilities............ 18,237 42,882 61,119 9,595 80 (3,015 ) 67,779
Long-term debt, less current
portion.................... 28,591 37,894 66,485 2,337 6,000 74,822
Other liabilities............ 2,977 (2,406 ) 571
----------- ------------- ----------- ------- --------- ------------ ------------
Total Liabilities........ 46,828 80,776 127,604 14,909 6,080 (5,421 ) 143,172
Redeemable Preferred Stock... 4,259 4,259
Stockholders' Equity
(Deficit).................. 5,015 (15,654 ) (10,639 ) 8,254 4,389 (24,740 ) (22,736 )
----------- ------------- ----------- ------- --------- ------------ ------------
Total Liabilities and
Stockholders' Equtiy... $ 51,843 $ 65,122 $ 116,965 $ 23,163 $ 14,728 $ (30,161 ) $ 124,695
----------- ------------- ----------- ------- --------- ------------ ------------
----------- ------------- ----------- ------- --------- ------------ ------------
</TABLE>
F-37
<PAGE>
CONDENSED COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY GUARANTORS
---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASC AND KOLMAR--US COMBINED
PIEDMONT OPERATIONS GUARANTORS NONGUARANTORS OSG ELIMINATIONS
----------- ------------- ----------- --------------- ----- ---------------
Net Revenue.................... $ 110,328 $ 72,480 $ 182,808 $ 30,686
Cost of Goods Sold............. 95,211 58,675 153,886 27,524
----------- ------------- ----------- ------- ----- -----
Gross Profit................... 15,117 13,805 28,922 3,162
Selling, General and
Administrative............... 10,784 6,118 16,902 1,919
----------- ------------- ----------- ------- ----- -----
Income from Operations......... 4,333 7,687 12,020 1,243
Interest Expense, net.......... (4,221) (3,709) (7,930) (402)
Other Income (Expense), net.... (126)
----------- ------------- ----------- ------- ----- -----
Income Before Provision For
Income Taxes................. 112 3,978 4,090 715
Provision For Income Taxes..... 568 128 696 1,167
----------- ------------- ----------- ------- ----- -----
Income (Loss) Before
Extraordinary Item........... (456) 3,850 3,394 (452)
Extraordinary Item--Loss From
Early Extinguishment of
Debt......................... (1,060) (1,060)
----------- ------------- ----------- ------- ----- -----
Net (Loss) Income.............. $ (1,516) $ 3,850 $ 2,334 $ (452) $ -- $ --
----------- ------------- ----------- ------- ----- -----
----------- ------------- ----------- ------- ----- -----
<CAPTION>
<S> <C>
CONSOLIDATED
TOTAL
------------
Net Revenue.................... $ 213,494
Cost of Goods Sold............. 181,410
------------
Gross Profit................... 32,084
Selling, General and
Administrative............... 18,821
------------
Income from Operations......... 13,263
Interest Expense, net.......... (8,332)
Other Income (Expense), net.... (126)
------------
Income Before Provision For
Income Taxes................. 4,805
Provision For Income Taxes..... 1,863
------------
Income (Loss) Before
Extraordinary Item........... 2,942
Extraordinary Item--Loss From
Early Extinguishment of
Debt......................... (1,060)
------------
Net (Loss) Income.............. $ 1,882
------------
------------
</TABLE>
RATIO OF EARNINGS TO FIXED CHARGES FOR SUBSIDIARY GUARANTORS
<TABLE>
<CAPTION>
SUBSIDIARY GUARANTOR RATIO
- ----------------------------------------------------------------------------- -----
<S> <C>
ASC.......................................................................... 1.10
Piedmont..................................................................... .85
Kolmar-US Operations......................................................... 2.00
</TABLE>
F-38
<PAGE>
CONDENSED COMBINED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY GUARANTORS
--------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASC AND KOLMAR--US COMBINED CONSOLIDATED
PIEDMONT OPERATIONS GUARANTORS NONGUARANTORS OSG ELIMINATIONS TOTAL
----------- ------------ ----------- --------------- --------- ------------- -------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss) from
continuing operations...... $ (1,516) $ 3,850 $ 2,334 $ (452) $ 1,882
Total adjustments to
reconcile net income (loss)
from continuing operations
to net cash provided by
(used in) operating
activities................. 7,564 (10,058) (2,494) 5,666 3,172
----------- ------------ ----------- ------- --------- ------------- -------------
Net cash provided by (used
in) operating
activities............... 6,048 (6,208) (160) 5,214 5,054
CASH FLOWS FROM INVESTING
ACTIVITIES
Capital Expenditures......... (1,486) (2,211) (3,697) (655) (4,352)
Sale of property, plant or
equipment.................. 46 46 7 53
Sale of short-term
investment, net............ 100 100 100
----------- ------------ ----------- ------- --------- ------------- -------------
Net cash used in investing
activities............... (1,386) (2,165) (3,551) (648) (4,199)
CASH FLOWS FROM FINANCING
ACTIVITIES
Deferred financing
acquisition................ (1,742) (1,742) (1,742)
Net repayments on revolving
loan....................... (2,075) (2,075) (2,075)
Repayments of long-term
debt....................... (20,938) (20,938) (2,197) (23,135)
Borrowing on senior term
loans...................... 20,500 20,500 20,500
Proceeds on borrowing from
affiliate.................. 7,861 7,861 2,332 10,193
Payments of dividends on
preferred stock............ (329) (329) (329)
----------- ------------ ----------- ------- --------- ------------- -------------
Net cash provided by (used
in) financing
activities............... (4,584) 7,861 3,277 135 3,412
Net increase (decrease) in
cash and cash
equivalents................ 78 (512) (434) 4,701 4,267
Cash and cash equivalents at
beginning of year.......... 260 714 974 4,652 5,626
----------- ------------ ----------- ------- --------- ------------- -------------
Cash and cash equivalents
at end of year........... $ 338 $ 202 $ 540 $ 9,353 $ 9,893
----------- ------------ ----------- ------- --------- ------------- -------------
----------- ------------ ----------- ------- --------- ------------- -------------
</TABLE>
F-39
<PAGE>
CONDENSED COMBINED BALANCE SHEET AT DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY GUARANTORS
---------------------------------------
ASC AND KOLMAR--US COMBINED CONSOLIDATED
PIEDMONT OPERATIONS GUARANTORS NONGUARANTORS OSG ELIMINATIONS TOTAL
----------- ------------- ----------- --------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Current Assets:
Cash and short term
investments.............. $ 260 $ 714 $ 974 $ 4,652 $ 5,626
Short term investments..... $ 350 $ 350 $ 350
Accounts Receivable, net... 16,415 8,662 25,077 5,481 30,558
Other receivables.......... 188 2,143 2,331 139 (2,275) 195
Inventories................ 10,143 7,898 18,041 7,787 25,828
Prepaid expenses and other
current assets........... 1,124 1,159 2,283 229 (124) 2,388
----------- ------------- ----------- ------- --------- ------------ ------------
Total Current Assets..... 28,480 20,576 49,056 18,288 (2,399) 64,945
Property and equipment,
net........................ 10,091 14,065 24,156 5,067 (140) 29,083
Goodwill, net................ 9,921 3,894 13,815 13,815
Intercompany receivable
(payable).................. 3,574 3,574 (3,574)
Investment in subsidiaries... 12,150 12,150 16,090 (28,240)
Other long-term assets....... 3,859 8,621 12,480 12,480
----------- ------------- ----------- ------- --------- ------------ ------------
Total Assets............. $ 52,351 $ 62,880 $ 115,231 $ 23,355 $ 16,090 $ (34,353) $ 120,323
----------- ------------- ----------- ------- --------- ------------ ------------
----------- ------------- ----------- ------- --------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable............. 10,387 5,728 16,115 5,528 21,643
Other payables............... 27,792 27,792 1,928 29,720
Accrued liabilities.......... 1,979 4,243 6,222 2,682 (2,434 ) 6,470
Current portion of long-term
debt....................... $ 2,688 $ 41 2,729 $ 2,217 4,946
----------- ------------- ----------- ------- --------- ------------ ------------
Total current
liabilities............ 15,054 37,804 52,858 12,355 (2,434 ) 62,779
Long-term debt, less current
portion.................... 36,016 20,305 56,321 3,561 (3,561 ) 56,321
Other liabilities............ 503 19,409 19,912 77 (243 ) 19,746
----------- ------------- ----------- ------- --------- ------------ ------------
Total liabilities........ 51,573 77,518 129,091 15,993 (6,238 ) 138,846
Redeemable Preferred Stock... 4,118 4,118
Stockholders' Equity
(Deficit).................. 778 (14,638 ) (13,860 ) 7,362 11,972 (28,115 ) (22,641 )
----------- ------------- ----------- ------- --------- ------------ ------------
Total Liabilities and
Stockholders' Equity... $ 52,351 $ 62,880 $ 115,231 $ 23,355 $ 16,090 $ (34,353 ) $ 120,323
----------- ------------- ----------- ------- --------- ------------ ------------
----------- ------------- ----------- ------- --------- ------------ ------------
</TABLE>
F-40
<PAGE>
CONDENSED COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY GUARANTORS
---------------------------------------
ASC AND KOLMAR--US COMBINED CONSOLIDATED
PIEDMONT(*) OPERATIONS GUARANTORS NONGUARANTORS OSG ELIMINATIONS TOTAL
----------- ------------- ----------- --------------- --------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Revenues................ $ 107,709 $ 70,314 $ 178,023 $ 33,567 $ (565) $ 211,025
Cost of Goods Sold.......... 92,586 56,432 149,018 27,846 (565) 176,299
----------- ------------- ----------- ------- --------- ----- ------------
Gross Profit................ 15,123 13,882 29,005 5,721 34,726
Selling, General and
Administrative Expenses... 8,208 6,883 15,091 3,018 (100) 18,209
----------- ------------- ----------- ------- --------- ----- ------------
Income (Loss) from
Operations................ 6,915 6,999 13,914 2,703 (100) 16,517
Interest Expense, net....... (3,817) (3,167) (6,984) (530) (7,514)
Other Income (Expense),
net....................... 2 2 2
----------- ------------- ----------- ------- --------- ----- ------------
Income (Loss) Before
Provision For Income
Taxes..................... 3,100 3,832 6,932 2,173 (100) 9,005
Provision For Income
Taxes..................... 1,295 29 1,324 1,031 2,355
----------- ------------- ----------- ------- --------- ----- ------------
Income (Loss) Before
Cumulative Effect of
Change in Accounting
Principle................. 1,805 3,803 5,608 1,142 (100) 6,650
Cumulative Effect of Change
in Accounting Principle... (7,000) (7,000) (7,000)
----------- ------------- ----------- ------- --------- ----- ------------
Net (Loss) Income........... $ (5,195) $ 3,803 $ (1,392) $ 1,142 $ (100) $ (350)
----------- ------------- ----------- ------- --------- ----- ------------
----------- ------------- ----------- ------- --------- ----- ------------
</TABLE>
RATIO OF EARNINGS TO FIXED CHARGES FOR SUBSIDIARY GUARANTORS
<TABLE>
<CAPTION>
SUBSIDIARY GUARANTOR RATIO
- ----------------------------------------------------------------------------- -----
<S> <C>
ASC.......................................................................... 1.45
Piedmont(*).................................................................. 3.74
Kolmar-US Operations......................................................... 2.09
</TABLE>
- ------------------------
(*) The Piedmont financial data is derived from unaudited financial statements.
F-41
<PAGE>
CONDENSED COMBINED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY GUARANTORS
---------------------------------------
ASC AND KOLMAR--US COMBINED CONSOLIDATED
PIEDMONT(*) OPERATIONS GUARANTORS NONGUARANTORS OSG ELIMINATIONS TOTAL
----------- ------------- ----------- --------------- --------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss) from
continuing operations..... $ (5,195) $ 3,803 $ (1,392) $ 1,142 $ (100) $ (350)
Total adjustments to
reconcile net income
(loss) from continuing
operations to net cash
provided by (used in)
operating activities...... 7,403 (2,177) 5,226 1,775 7,001
----------- ------------- ----------- ------- --------- ----- -------------
Net cash provided by (used
in) operating
activities.............. 2,208 1,626 3,834 2,917 (100) 6,651
CASH FLOWS FROM INVESTING
ACTIVITIES
Sale of property, plant or
equipment, net of gain.... 15 32 47 47
Capital expenditures........ (1,411) (2,557) (3,968) (1,279) (5,247)
Acquisition of Imperial
Cosmetics, net of cash.... (5,800) (5,800) (5,800)
Acquisition of Piedmont
Laboratories, net of
cash...................... (14,060) (14,060) (14,060)
Change in deferred taxes.... (30) (30) (30)
Purchase of short-term
investment, net........... (350) (350) (350)
----------- ------------- ----------- ------- --------- ----- -------------
Net cash used in investing
activities.............. (15,836) (8,325) (24,161) (1,279) (25,440)
----------- ------------- ----------- ------- --------- ----- -------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Net borrowing on revolving
loans..................... 5,976 5,976 5,976
Net payments on line of
credit.................... (291) (291) (291)
Repayments of long-term
debt...................... (3,742) (3,742) (3,742)
Borrowing on senior term
loans..................... 5,000 5,000 5,000
Proceeds of debt due to
affiliate................. 7,031 7,031 7,031
Proceeds of notes payable... 366 366 366
Dividends to Parent......... (100) (100) 100
Proceeds of issuance of
common stock.............. 7,000 7,000 7,000
----------- ------------- ----------- ------- --------- ----- -------------
Net cash provided by
financing activities.... 13,843 7,397 21,240 100 21,340
Net increase in cash and
cash equivalents.......... 215 698 913 1,638 2,551
Cash and cash equivalents at
beginning of year......... 45 16 61 3,014 3,075
----------- ------------- ----------- ------- --------- ----- -------------
Cash and cash equivalents
at end of year.......... $ 260 $ 714 $ 974 $ 4,652 $ 5,626
----------- ------------- ----------- ------- --------- ----- -------------
----------- ------------- ----------- ------- --------- ----- -------------
</TABLE>
- ------------------------------
(*) The Piedmont financial data is derived from unaudited financial statements.
F-42
<PAGE>
CONDENSED COMBINED BALANCE SHEET AT DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY GUARANTORS
----------------------------------------
ASC AND KOLMAR--US COMBINED CONSOLIDATED
PIEDMONT(*) OPERATIONS GUARANTORS NONGUARANTORS OSG ELIMINATIONS TOTAL
------------- ------------ ----------- --------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Current Assets:
Cash......................... $ 45 $ 16 $ 61 $ 3,014 $ 3,075
Accounts Receivable, net..... 13,297 8,563 21,860 4,562 26,422
Other Receivables............ 904 904 170 (1,019) 55
Inventories.................. 9,856 4,766 14,622 4,141 18,763
Prepaid expenses and other
current assets............. 711 776 1,487 100 1,587
------------- ------------ ----------- ------- --------- ------------ ------------
Total current assets..... 23,909 15,025 38,934 11,987 (1,019) 49,902
Property and equipment, net.... 10,386 12,080 22,466 4,144 (140) 26,470
Goodwill, net.................. 12,601 12,601 12,601
Intercompany receivable
(payable).................... 2,638 2,638 (2,638)
Investment in subsidiaries..... 6,916 6,916 9,190 (16,106)
Other long-term assets......... 5,930 11,586 17,516 17,516
------------- ------------ ----------- ------- --------- ------------ ------------
Total Assets............. $ 52,826 $ 48,245 $ 101,071 $ 16,131 $ 9,190 $ (19,903) $ 106,489
------------- ------------ ----------- ------- --------- ------------ ------------
------------- ------------ ----------- ------- --------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable............... $ 12,412 $ 3,292 $ 15,704 $ 2,777 $ 18,481
Other payables................. 316 316 686 (812) 190
Accrued liabilities............ 1,804 23,374 25,178 2,048 (348) 26,878
Current portion of long-term
debt......................... 2,923 2,923 1,831 4,754
------------- ------------ ----------- ------- --------- ------------ ------------
Total current
liabilities.............. 17,139 26,982 44,121 7,342 (1,160) 50,303
Long-term debt, less current
portion...................... 28,836 45,172 74,008 2,600 (2,600) 74,008
Other liabilities.............. 347 347 25 (243) 129
------------- ------------ ----------- ------- --------- ------------ ------------
Total liabilities........ 46,322 72,154 118,476 9,967 (4,003) 124,440
Redeemable Preferred Stock..... 3,633 3,633
Stockholders' equity
(deficit).................... 6,504 (23,909) (17,405) 6,164 5,557 (15,900) (21,584)
------------- ------------ ----------- ------- --------- ------------ ------------
Total Liabilities and
Stockholders' Equity... $ 52,826 $ 48,245 $ 101,071 $ 16,131 $ 9,190 $ (19,903) $ 106,489
------------- ------------ ----------- ------- --------- ------------ ------------
------------- ------------ ----------- ------- --------- ------------ ------------
</TABLE>
- ------------------------
(*) The Piedmont financial data is derived from unaudited financial statements.
F-43
<PAGE>
CONDENSED COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
SUBSIDIARY GUARANTORS
-----------------------------------------
ASC AND KOLMAR--US COMBINED CONSOLIDATED
PIEDMONT(*) OPERATIONS GUARANTORS NONGUARANTORS OSG ELIMINATIONS TOTAL
------------- ------------- ----------- --------------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Revenues.................. $ 93,108 $ 51,820 $ 144,928 $ 23,446 $ (959) $ 167,415
Cost of Goods Sold............ 79,632 41,247 120,879 20,019 (959) 139,939
------------- ------------- ----------- ------- --------- ------ ------------
Gross Profit.................. 13,476 10,573 24,049 3,427 27,476
Selling, General and
Adminstrative Expense....... 7,998 5,643 13,641 3,516 100 17,257
------------- ------------- ----------- ------- --------- ------ ------------
Income (Loss) from
operations.................. 5,478 4,930 10,408 (89) (100) 10,219
Interest Expense, net......... (3,892) (2,809) (6,701) (324) (7,025)
Other income (expense), net... 128 128 128
------------- ------------- ----------- ------- --------- ------ ------------
Income (Loss) before provision
for income taxes............ 1,714 2,121 3,835 (413) (100) 3,322
Provision for income taxes.... 687 361 1,048 305 1,353
------------- ------------- ----------- ------- --------- ------ ------------
Income (loss) before
extraordinary item.......... $ 1,027 $ 1,760 $ 2,787 $ (718) $ (100) $ -- $ 1,969
------------- ------------- ----------- ------- --------- ------ ------------
------------- ------------- ----------- ------- --------- ------ ------------
</TABLE>
RATIO OF EARNINGS TO FIXED CHARGES FOR SUBSIDIARY GUARANTORS
<TABLE>
<CAPTION>
SUBSIDIARY GUARANTOR RATIO
- ----------------------------------------------------------------------------- -----
<S> <C>
ASC.......................................................................... 1.02
Piedmont..................................................................... 7.31
Kolmar-US Operations......................................................... 1.69
</TABLE>
- ------------------------
(*) The Piedmont financial data is derived from unaudited financial statements.
F-44
<PAGE>
CONDENSED COMBINED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY GUARANTORS
--------------------------------------
ASC AND KOLMAR--US COMBINED CONSOLIDATED
PIEDMONT* OPERATIONS GUARANTORS NONGUARANTORS OSG ELIMINATIONS TOTAL
----------- ------------ ----------- --------------- --------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss) from
continuing operations......... $ 1,027 $ 1,760 $ 2,787 $ (718) $ (100) $ -- $ 1,969
Total adjustments to reconcile
net income (loss) from
continuing operations to net
cash provided by (used in)
operating activities.......... 1,784 (12,300) (10,516) 2,462 (8,054)
----------- ------------ ----------- ------- --------- ----- -------------
Net cash provided by (used in)
operating activities.......... 2,811 (10,540) (7,729) 1,744 (100) (6,085)
CASH FLOWS FROM INVESTING
ACTIVITIES
Sale of property, plant and
equipment, net of gain........ 1,246 1,246 77 1,323
Capital expenditures............ (1,218) (2,326) (3,544) (1,233) (4,777)
Decrease (increase) in note
receivable from shareholder... 46 46 46
Increase in intangible assets... (19) (19) (19)
----------- ------------ ----------- ------- --------- ----- -------------
Net cash used in investing
activities.................... (1,191) (1,080) (2,271) (1,156) (3,427)
CASH FLOWS FROM FINANCING
ACTIVITIES
Net repayments on revolving
loans......................... (795) (795) (795)
Repayments on long-term debt.... (1,125) (1,125) (1,125)
Proceeds of debt due to
affiliate..................... 10,724 10,724 10,724
Proceeds of notes payable....... 880 880 880
Dividends to Parent............. (100) (100) 100
Proceeds from issuance of common
stock......................... 70 70 70
Increase in Book Overdraft...... 365 365 365
----------- ------------ ----------- ------- --------- ----- -------------
Net cash provided by (used in)
financing activities.......... (1,585) 11,604 10,019 100 10,119
----------- ------------ ----------- ------- --------- ----- -------------
Net increase (decrease) in cash
and cash equivalents.......... 35 (16) 19 588 607
Cash and cash equivalents at
beginning of year............. 10 32 42 2,426 2,468
----------- ------------ ----------- ------- --------- ----- -------------
Cash and cash equivalents at end
of year....................... $ 45 $ 16 $ 61 $ 3,014 $ -- $ -- $ 3,075
----------- ------------ ----------- ------- --------- ----- -------------
----------- ------------ ----------- ------- --------- ----- -------------
</TABLE>
- ------------------------
(*) The Piedmont financial data is derived from unaudited financial statements.
F-45
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY GUARANTOR OR BT ALEX. BROWN
INCORPORATED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information...................................................... iii
Prospectus Summary......................................................... 1
Risk Factors............................................................... 14
Use of Proceeds............................................................ 23
Capitalization............................................................. 24
Unaudited Pro Forma Condensed Combined Financial Data...................... 25
Selected Historical and Unaudited Pro Forma Combined Financial Data........ 28
Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 32
The Exchange Offer......................................................... 40
Business................................................................... 47
Management................................................................. 57
Security Ownership of Certain Beneficial Owners and Management............. 62
Certain Relationships and Related Transactions............................. 64
Description of Certain Terms of the Preferred Stock and the Warrant
Agreement................................................................. 67
Description of Acquisition Agreements...................................... 68
Description of the Senior Secured Credit Facility.......................... 69
Description of Notes....................................................... 71
Certain Federal Tax Consequences........................................... 105
Plan of Distribution....................................................... 106
Legal Matters.............................................................. 106
Change in Independent Accountants.......................................... 107
Experts.................................................................... 107
Index to Financial Statements.............................................. F-1
</TABLE>
UNTIL , 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES, WHETHER OR NOT PARTICIPATING IN
THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER THIS PROSPECTUS.
$105,000,000
OSG
OUTSOURCING SERVICES GROUP, INC.
10 7/8% SERIES B
SENIOR SUBORDINATED NOTES
DUE 2006
-----------------------------
PROSPECTUS
-----------------------------
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
THE COMPANY
Section 145 of the General Corporation Law of the State of Delaware (the
"Delaware Corporation Law") empowers a Delaware corporation to indemnify any
persons who are, or are threatened to be made, parties to any threatened,
pending or completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person is or was an officer,
director, employee or agent of such corporation, or is or was serving at the
request of such corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided that such officer or
director acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests, and, for criminal proceedings,
had no reasonable cause to believe his conduct was unlawful. A Delaware
corporation may indemnify officers and directors against expenses (including
attorneys' fees) in an action by or in the right of the corporation under the
same conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the corporation.
Where an officer or director is successful on the merits or otherwise in the
defense of any action referred to above, the corporation must indemnify him
against the expenses which such officer or director actually and reasonably
incurred.
Article Seventh of the Certificate of Incorporation of the Company, as
amended, a copy of which is filed as Exhibit 3.1 to the Registration Statement,
allows the Company to maintain director and officer liability insurance on
behalf of any person who is or was a director or officer of the Company or such
person who serves or served as director, officer, employee or agent, of another
corporation, partnership or other enterprise at the request of the Company.
Article Seventh of the Company's Certificate of Incorporation, as amended,
provides for indemnification of the officers and directors of the Company, to
the fullest extend permitted by applicable law.
Pursuant to Section 102(b)(7) of the Delaware Corporation Law, Articles
Sixth and Seventh of the Certificate of Incorporation of the Company, as
amended, provide that no director of the Company shall be personally liable to
the Company or its shareholders for monetary damages for any breach of his
fiduciary duty as a director; provided, however, that such clause shall not
apply to any liability of a director (1) for any breach of the Director's duty
of loyalty to the Company or its stockholders, (2) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of the
law, (3) pursuant to Section 174 of the Delaware Corporation Law, or (4) for any
transaction from which the director derived an improper personal benefit.
THE GUARANTORS
The Guarantors, Aerosol, Kolmar and Piedmont, are incorporated under the
laws of the States of California, Delaware and Georgia, respectively. As with
the Delaware Corporation Law, the California Corporations Code and the Business
Corporations Code of Georgia authorize a corporation, under certain
circumstances, to indemnify its directors and officers (including to reimburse
them for expenses incurred).
As with the Company's Certificate of Incorporation, as amended, and Bylaws,
each of the Guarantor's organizational documents and Bylaws generally provide
for the indemnification of officers and directors to the fullest extent
permitted by law.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
*1.1 Purchase Agreement dated February 26, 1998, between Outsourcing Services Group, Inc. (the "Company") and
BT Alex. Brown Incorporated ("BT").
*3.1 Certificate of Incorporation of Aerosol Services Holding Corporation ("ASHC") (which later changed its
name to "Outsourcing Services Group, Inc."), as amended to date.
*3.2 By-Laws of ASHC.
*3.3 Articles of Incorporation of ASC Merger Corp. ("ASCMC") (which later changed its name to "Aerosol
Services Company, Inc."), as amended to date.
*3.4 By-Laws of ASCMC, as amended to date.
*3.5 Certificate of Incorporation of Kolmar Laboratories, Inc. ("Kolmar"), as amended to date.
*3.6 By-Laws of Kolmar, as amended to date.
*3.7 Restated Articles of Incorporation of Piedmont Laboratories, Inc. ("Piedmont"), as amended to date.
*3.8 By-Laws of Piedmont.
*4.1 Indenture, dated March 3, 1998, among the Company, the Guarantors listed therein and U.S. Bank Trust
National Association (formerly First Trust National Association), as Trustee, relating to the 10 7/8%
Series B Senior Subordinated Notes due 2006 of the Company (the "New Notes") and the 10 7/8% Senior
Subordinated Notes due 2006 of the Company (the "Old Notes").
*4.2 Form of New Note (included in Exhibit 4.1).
*4.3 Registration Rights Agreement, dated as of March 3, 1998, by and among the Company, the Guarantors
listed therein and BT.
*4.4 Registration Rights Agreement, dated as of February 14, 1994, by and among ASHC and the investors that
are parties thereto.
*5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, special counsel to the Company.
*9.1 Amended and Restated Stockholder Agreement, dated as of June 30, 1997, among the Company and certain
stockholders listed therein.
*9.2 Amendment to Stockholder Agreement, dated December 31, 1997, among the Company and certain stockholders
listed therein.
*10.1 Credit Agreement, dated as of January 8, 1998 ("Credit Agreement"), among the Company, as guarantor,
Aerosol Services Company, Inc. ("Aerosol"), Piedmont and additional subsidiaries of the Company, as
Borrowers, the Lenders party thereto, BT Commercial Corporation, as Agent, and Heller Financial, Inc.,
as Co-Agent.
*10.2 Amendment and Waiver No. 1, dated as of April 29, 1998, to the Credit Agreement, by and among the
Company, Aerosol and Piedmont, as initial Borrowers, Kolmar, as an additional Borrower, each financial
institution from time to time party to the Credit Agreement, BT Commercial Corporation, as Agent for
Lenders and Heller Financial, Inc., as Co-agent.
*10.3 Outsourcing Services Group, Inc. 1998 Stock Option Plan.
*10.4 Stock Option Agreement, dated December 31, 1997, between the Company and Christopher Denney.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
*10.5 Amended and Restated Warrant Agreement between the Company and Chase Capital, L.P., dated January 8,
1998.
*10.6 Amended and Restated Management Services Agreement, dated January 8, 1998, by and between The
Gordon+Morris Group, the Company, Aerosol, Piedmont and Kolmar.
*10.7 Advisory and Financial Services Agreement by and between the Company and HarbourVest Partners LLC, dated
January 8, 1998.
*10.8 Employment and Non-Competition Agreement between the Company and Christopher Denney, dated January 9,
1998.
*10.9 Share and Asset Purchase Agreement, dated October 28, 1997, between CCL Industries, Inc., CCL Industries
Corporation and the Company.
*10.10 Amendment to Share and Asset Purchase Agreement, dated January 1, 1998, between CCL Industries, Inc.,
CCL Industries Corporation and the Company.
*10.11 Modification Agreement, dated January 8, 1998, between CCL Industries, Inc., CCL Industries Corporation
and the Company.
*10.12 Agreement and Plan of Merger, dated June 20, 1997, by and between Aerosol Companies Holding Corporation
("ACHC") and ASHC.
*10.13 Stock Purchase Agreement, dated as of June 27, 1996, by and among ACHC, Samuel D. Garretson, Garretson,
O'Sullivan Charitable Trust, certain other shareholders listed therein and Piedmont.
*10.14 Amendment to Stock Purchase Agreement, dated September 30, 1996, by and among ACHC, Samuel D. Garretson,
Garretson, O'Sullivan Charitable Trust, certain other shareholders listed therein and Piedmont.
*10.15 Purchase and Merger Agreement, dated February 14, 1994, by and among Aerosol, Walter Lim and Howard Lim,
as the Sellers, ASHC and ASCMC.
*10.16 Amendment and Termination of Employment Contract, dated December 31, 1997, for Howard C. Lim.
*10.17 Amendment and Termination of Employment Contract, dated December 31, 1997, for Samuel D. Garretson.
*10.18 Employment, Non-Disclosure and Limited Non-Competition Agreement between the Company and Joseph W.
Sortais.
*10.19 Employment, Non-Disclosure and Limited Non-Competition Agreement between the Company and John G. Hewson.
*10.20 Employment, Non-Disclosure and Limited Non-Competition Agreement between the Company and Dennis Nolan.
12.1 Statement regarding the computation of ratio of earnings to fixed charges for the Company.
12.2 Statement regarding the computation of ratio of earnings to fixed charges for each of Aerosol
(Guarantors only), Piedmont (Guarantors only) and Kolmar (Guarantors only).
*16.1 Letter from Deloitte & Touche LLP regarding Change in Independent Accountants.
*21.1 Subsidiaries of the Company.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of KPMG Peat Marwick LLP.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
23.4 Consent of Moore, Colson & Company, P.C.
*23.5 Consent of Skadden, Arps, Slate, Meagher & Flom LLP, special counsel to the Company (included in Exhibit
5.1).
*24.1 Power of Attorney (included in signature page).
*25.1 Statement of Eligibility and Qualification on Form T-1 of U.S. Bank Trust National Association, as
Trustee under the Indenture relating to the New Notes.
*27.1 Financial Data Schedule.
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Letter of Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees.
*99.4 Form of Letter to Clients.
</TABLE>
- ------------------------
* Previously filed.
(b) Financial statement Schedules:
Schedule II--Valuation and Qualifying Accounts and Reserves.
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Act");
(ii) To reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the Registration Statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
Registration Statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement;
(2) That, for the purpose of determining any liability under the Act, each
such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the Offering.
II-4
<PAGE>
(b) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrants
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrants of
expenses incurred or paid by a director, officer or controlling person of
the Registrants in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the Registrants will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(c) The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11 or 13 of this form, within one business day of receipt
of such request, and to send the incorporated documents by first class mail
or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the Registration
Statement through the date of responding to the request.
(d) The undersigned Registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Outsourcing Services Group, Inc. has duly caused this Amendment No. 2 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Port Jervis, State of New York, on the 4th day of
November, 1998.
<TABLE>
<S> <C>
OUTSOURCING SERVICES GROUP, INC.
By: *
------------------------------------------
Christopher Denney
CHIEF EXECUTIVE OFFICER AND PRESIDENT
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chief Executive Officer,
* President and Director
- ------------------------------ (Principal Executive November 4, 1998
Christopher Denney Officer)
Chief Financial Officer,
/s/ JOSEPH W. SORTAIS Treasurer and Secretary
- ------------------------------ (Principal Financial and November 4, 1998
Joseph W. Sortais Accounting Officer)
*
- ------------------------------ Chairman of the Board November 4, 1998
Walter K. Lim
*
- ------------------------------ Director November 4, 1998
Samuel D. Garretson
*
- ------------------------------ Director November 4, 1998
Howard C. Lim
*
- ------------------------------ Director November 4, 1998
John H. Morris
*
- ------------------------------ Assistant Secretary and November 4, 1998
Drew H. Adams Director
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ Director November 4, 1998
Frank Edelstein
*
- ------------------------------ Director November 4, 1998
Robert M. Wadsworth
*
- ------------------------------ Director November 4, 1998
Joseph A. Marino
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ JOSEPH W. SORTAIS
-------------------------
Joseph W. Sortais,
ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Aerosol Services Company, Inc. has duly caused this Amendment No. 2 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Port Jervis, State of New York, on the 4th day of
November, 1998.
<TABLE>
<S> <C>
AEROSOL SERVICES COMPANY, INC.
By: *
------------------------------------------
Christopher Denney
CHIEF EXECUTIVE OFFICER
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
* Chief Executive Officer
- ------------------------------ and Director (Principal November 4, 1998
Christopher Denney Executive Officer)
Chief Financial Officer,
/s/ JOSEPH W. SORTAIS Treasurer and Secretary
- ------------------------------ (Principal Financial and November 4, 1998
Joseph W. Sortais Accounting Officer)
*
- ------------------------------ Chairman of the Board November 4, 1998
Walter K. Lim
*
- ------------------------------ Director November 4, 1998
Samuel D. Garretson
*
- ------------------------------ Director November 4, 1998
Howard C. Lim
*
- ------------------------------ Director November 4, 1998
John H. Morris
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ Assistant Secretary and November 4, 1998
Drew H. Adams Director
*
- ------------------------------ Director November 4, 1998
Frank Edelstein
*
- ------------------------------ Director November 4, 1998
Robert M. Wadsworth
*
- ------------------------------ Director November 4, 1998
Joseph A. Marino
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ JOSEPH W. SORTAIS
-------------------------
Joseph W. Sortais,
ATTORNEY-IN-FACT
</TABLE>
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Kolmar Laboratories, Inc. has duly caused this Amendment No. 2 to Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Port Jervis, State of New York, on the 4th day of
November, 1998.
<TABLE>
<S> <C>
KOLMAR LABORATORIES, INC.
By: *
------------------------------------------
Christopher Denney
CHIEF EXECUTIVE OFFICER
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
* Chief Executive Officer
- ------------------------------ and Director (Principal November 4, 1998
Christopher Denney Executive Officer)
Chief Financial Officer,
/s/ JOSEPH W. SORTAIS Treasurer and Secretary
- ------------------------------ (Principal Financial and November 4, 1998
Joseph W. Sortais Accounting Officer)
*
- ------------------------------ Chairman of the Board November 4, 1998
Walter K. Lim
*
- ------------------------------ Director November 4, 1998
Samuel D. Garretson
*
- ------------------------------ Director November 4, 1998
Howard C. Lim
*
- ------------------------------ Director November 4, 1998
John H. Morris
*
- ------------------------------ Assistant Secretary and November 4, 1998
Drew H. Adams Director
</TABLE>
II-10
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ Director November 4, 1998
Frank Edelstein
*
- ------------------------------ Director November 4, 1998
Robert M. Wadsworth
*
- ------------------------------ Director November 4, 1998
Joseph A. Marino
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ JOSEPH W. SORTAIS
-------------------------
Joseph W. Sortais,
ATTORNEY-IN-FACT
</TABLE>
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Piedmont Laboratories, Inc. has duly caused this Amendment No. 2 to Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Port Jervis, State of New York, on the 4th day of
November, 1998.
<TABLE>
<S> <C>
PIEDMONT LABORATORIES, INC.
By: *
------------------------------------------
Christopher Denney
CHIEF EXECUTIVE OFFICER
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
* Chief Executive Officer
- ------------------------------ and Director (Principal November 4, 1998
Christopher Denney Executive Officer)
Chief Financial Officer,
/s/ JOSEPH W. SORTAIS Treasurer and Secretary
- ------------------------------ (Principal Financial and November 4, 1998
Joseph W. Sortais Accounting Officer)
*
- ------------------------------ Chairman of the Board November 4, 1998
Walter K. Lim
*
- ------------------------------ Director November 4, 1998
Samuel D. Garretson
*
- ------------------------------ Director November 4, 1998
Howard C. Lim
*
- ------------------------------ Director November 4, 1998
John H. Morris
*
- ------------------------------ Assistant Secretary and November 4, 1998
Drew H. Adams Director
</TABLE>
II-12
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ Director November 4, 1998
Frank Edelstein
*
- ------------------------------ Director November 4, 1998
Robert M. Wadsworth
*
- ------------------------------ Director November 4, 1998
Joseph A. Marino
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ JOSEPH W. SORTAIS
-------------------------
Joseph W. Sortais,
ATTORNEY-IN-FACT
</TABLE>
II-13
<PAGE>
EXHIBIT 12.1
OUTSOURCING SERVICES GROUP, INC.
FIXED CHARGE RATIO COMPUTATION
<TABLE>
<CAPTION>
OSG
---------------------------------------------------------
PREDECESSOR SIX MONTHS ENDED
-------------------- ------------------------
FISCAL YEAR ENDED DECEMBER 31,
----------------------------------------------------- JUNE 29, JUNE 27,
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before taxes........................ $ 12 $ 638 $ 92 $ 1,443 $ 112 $ (228) $ 1,208
Fixed charges reflected in income (loss) before
taxes
Interest expense................................ 208 3,116 3,689 3,646 4,221 2,354 6,092
One-third of rental expenses.................... 330 337 342 378 461 230 400
--------- --------- --------- --------- --------- ----------- -----------
Total Fixed Charges............................... $ 538 $ 3,453 $ 4,031 $ 4,024 $ 4,682 $ 2,584 $ 6,492
--------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- ----------- -----------
Income (loss) before taxes plus fixed charges
above........................................... $ 550 $ 4,091 $ 4,123 $ 5,467 $ 4,794 $ 2,356 $ 7,700
Fixed charge deficiency........................... -- -- -- -- -- $ 228 --
Fixed charge ratio................................ 1.02x 1.18x 1.02x 1.36x 1.02x 0.91x 1.18x
</TABLE>
<PAGE>
EXHIBIT 12.2
AEROSOL SERVICES COMPANY, INC.
FIXED CHARGE RATIO COMPUTATION
(GUARANTORS ONLY)
<TABLE>
<CAPTION>
ASC
---------------------------------------------------------
FISCAL YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------
------------------------------- JUNE 29, JUNE 27,
1995 1996 1997 1997 1998
--------- --------- --------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Income (loss) before taxes........................................ $ 92 $ 1,688 $ 322 $ (226) $ 2,167
Fixed charges reflected in income (loss) before taxes
Interest expense................................................ 3,689 3,442 2,946 1,483 156
One third of rental expenses.................................... 342 336 336 168 179
--------- --------- --------- ----------- -----------
Total fixed charges............................................... $ 4,031 $ 3,778 $ 3,282 $ 1,651 $ 335
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Income (loss) before taxes plus fixed charges above............... $ 4,123 $ 5,466 $ 3,604 $ 1,425 $ 2,502
Fixed charge ratio................................................ 1.02x 1.45x 1.10x 0.86x 7.47x
Fixed charge deficiency......................................... -- -- -- (226) --
</TABLE>
<PAGE>
PIEDMONT LABORATORIES, INC.
FIXED CHARGE RATIO COMPUTATION
(GUARANTORS ONLY)
<TABLE>
<CAPTION>
PIEDMONT
---------------------------------------------------------
FISCAL YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------
------------------------------- JUNE 29, JUNE 27,
1995 1996 1997 1997 1998
--------- --------- --------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Income (loss) before taxes........................................ $ 1,622 $ 1,412 $ (210) $ (2) $ 568
Fixed charges reflected in income (loss) before taxes
Interest expense................................................ 203 375 1,275 420 385
One third of rental expenses.................................... 54 141 125 63 90
--------- --------- --------- ----- -----------
Total fixed charges............................................... $ 257 $ 516 $ 1,400 $ 483 $ 475
--------- --------- --------- ----- -----------
--------- --------- --------- ----- -----------
Income (loss) before taxes plus fixed charges above............... $ 1,879 $ 1,928 $ 1,190 $ 481 $ 1,043
Fixed charge ratio................................................ 7.31x 3.74x 0.85x 1.00x 2.20x
Fixed charge deficiency......................................... -- -- (210) (2) --
</TABLE>
<PAGE>
KOLMAR LABORATORIES, INC.
FIXED CHARGE RATIO COMPUTATION
(GUARANTORS ONLY)
<TABLE>
<CAPTION>
KOLMAR
---------------------------------------------------------
FISCAL YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------
------------------------------- JUNE 29, JUNE 27,
1995 1996 1997 1997 1998
--------- --------- --------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Income (loss) before taxes........................................ $ 2,121 $ 3,832 $ 3,978 $ 1,689 $ 4,059
Fixed charges reflected in income (loss) before taxes
Interest expense................................................ 2,809 3,167 3,709 1,799 136
One third of rental expenses.................................... 271 343 274 137 176
--------- --------- --------- ----------- -----------
Total fixed charges............................................... $ 3,080 $ 3,510 $ 3,983 $ 1,936 $ 312
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Income (loss) before taxes plus fixed charges above............... $ 5,201 $ 7,342 $ 7,961 $ 3,625 $ 4,371
Fixed charge ratio................................................ 1.69x 2.09x 2.00x 1.87x 14.00x
Fixed charge deficiency......................................... -- -- -- -- --
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Outsourcing Services
Group, Inc. on Form S-4 of our report dated March 3, 1998, appearing in the
Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
-----------------------------------------------------------------------
Deloitte & Touche LLP
Costa Mesa, California
November 5, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 (File
No. 333-57209) of our report dated February 23, 1996, on our audit of the
consolidated statements of operations, stockholders' deficit and cash flows for
the year ended December 31, 1995 of Outsourcing Services Group, Inc. and
subsidiary. We also consent to the reference to our firm under the caption
"Experts".
/s/ PRICEWATERHOUSECOOPERS LLP
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP
November 5, 1998
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITOR'S CONSENT
Board of Directors of
Outsourcing Services Group, Inc.
We consent to the use of our report with respect to the combined financial
statements of Kolmar Group included herein and to the reference to our firm
under the heading "Experts" in the registration statement on Form S-4 by
Outsourcing Services Group, Inc.
/s/ KPMG PEAT MARWICK LLP
------------------------------------------------------------------------
KPMG Peat Marwick LLP
Stamford, CT
October 29, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITOR
We consent to the inclusion in this registration statement of Outsourcing
Services Group, Inc. on Form S-4 of our report dated November 12, 1996, on our
audit of the financial statements of Piedmont Laboratories, Inc. for the year
ended September 29, 1996. We also consent to the reference to our firm under the
caption "Experts".
/s/ MOORE, COLSON & COMPANY, P.C.
- --------------------------------------------------------------------------------
Moore, Colson & Company, P.C.
Marietta, Georgia
October 29, 1998
