<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 3, 1999 COMMISSION FILE NUMBER: 333-57209
------------------------
OUTSOURCING SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0597491
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
650 FIFTH AVENUE, 14TH FLOOR 10022
NEW YORK, NY (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 957-6368
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
------------------------
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Number of shares of common stock, $.001 par value, outstanding as of
the close of business on April 3, 1999: 3,441,983 shares.
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
INDEX TO FORM 10-Q
<TABLE>
<S> <C> <C>
PART I. Financial Information
ITEM 1. Financial Statements
PAGE
----
Condensed Consolidated Balance Sheets as of April 3, 1999 (unaudited)
and December 31, 1998 3
Condensed Consolidated Statements of Operations for the
Three Months Ended April 3, 1999 and March 28, 1998 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended April 3, 1999 and March 28, 1998 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 14
PART II. Other Information 19
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBITS
</TABLE>
2
<PAGE>
OUTSOURCING SERVICES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
FOR THE THREE MONTHS ENDED APRIL 3, 1999 AND
THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
APRIL 3, DECEMBER 31,
1999 1998
--------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 9,139 $ 8,747
Short term investments 253 253
Accounts receivable, net 34,619 32,244
Other receivables 578 870
Inventories, net (Note 3) 29,371 27,443
Prepaid expenses and other current assets 1,160 556
Deferred income taxes, net 3,931 3,931
--------- -----------
Total current assets 79,051 74,044
PROPERTY AND EQUIPMENT, net 31,231 31,743
GOODWILL, net 70,840 71,554
DEFERRED FINANCING COSTS, net 7,389 7,714
ENVIRONMENTAL INSURANCE RECEIVABLE 7,750 7,750
DUE FROM CCL 3,376 3,376
OTHER ASSETS 1,485 1,500
--------- ------------
Total assets $201,122 $ 197,681
--------- ------------
LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 34,535 $ 27,429
Accrued expenses 13,580 16,930
Other current liabilities 284 930
------------- -------------
Total current liabilities 48,399 45,289
DEFERRED INCOME TAXES, net 1,275 1,275
ENVIRONMENTAL CONTINGENCIES AND
OTHER LIABILITIES 16,109 15,990
LONG TERM DEBT 105,000 105,000
--------- ----------
Total liabilities 170,783 167,554
REDEEMABLE SERIES A PREFERRED STOCK, $.001 par value;
3,750 shares authorized, issued and outstanding 375 375
REDEEMABLE SERIES B PREFERRED STOCK, $.001 par value;
26,250 shares authorized, issued and outstanding 4,147 4,094
CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 6,000,000 shares
authorized; 3,441,983 shares issued and outstanding as of
April 3, 1999 and 3,455,174 as of December 31, 1998. 3 3
Common stock warrants 663 663
Additional paid-in capital 32,140 32,272
Notes receivable from stockholders (764) (772)
Accumulated deficit (6,901) (6,584)
Accumulated other comprehensive income 676 76
---------- ----------
Total stockholders' equity 25,817 25,658
---------- ----------
Total Liabilities, Redeemable
Preferred Stock and Stockholders' Equity $201,122 $ 197,681
---------- ----------
---------- ----------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 3, 1999
AND MARCH 28, 1998 (UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
APRIL 3, MARCH 28,
1999 1998
----------- -----------
<S> <C> <C>
NET REVENUES $ 63,723 $ 53,875
COST OF GOODS SOLD 54,330 45,874
----------- -----------
GROSS PROFIT 9,393 8,001
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 6,014 4,973
----------- -----------
INCOME FROM OPERATIONS 3,379 3,028
INTEREST EXPENSE, net 3,388 2,827
----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY ITEM (9) 201
PROVISION FOR INCOME TAXES 246 633
----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM (255) (432)
EXTRAORDINARY ITEM, LOSS FROM EARLY EXTINGUISHMENT OF DEBT,
net of income tax benefit of $1,053 - (2,577)
----------- -----------
NET LOSS $ (255) $ (3,009)
ACCRETION AND DIVIDENDS ON PREFERRED STOCK (62) (62)
----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS (317) (3,071)
----------- -----------
----------- -----------
NET LOSS (255) (3,009)
OTHER COMPREHENSIVE INCOME (LOSS):
FOREIGN CURRENCY TRANSLATION ADJUSTMENT 600 (92)
----------- -----------
COMPREHENSIVE INCOME (LOSS) $ 345 $ (3,101)
----------- -----------
----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM PER SHARE $ (0.07) $ (0.14)
LOSS FROM EXTRAORDINARY ITEM PER SHARE -- (0.81)
----------- -----------
NET LOSS PER SHARE, Basic and diluted $ (0.07) $ (0.95)
----------- -----------
----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (0.09) $ (0.97)
----------- -----------
----------- -----------
WEIGHTED AVERAGE COMMON SHARES, basic and diluted 3,453,366 3,178,438
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 3, 1999 AND MARCH 28, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
APRIL 3, MARCH 28,
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (255) $ (3,009)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 1,962 1,930
Amortization of deferred financing costs 325 175
Provision for doubtful accounts 107 104
Extraordinary item - loss from early extinguishment of debt -- 3,630
Deferred income taxes -- (4,198)
Change in operating assets and liabilities, net of effect of
acquisition of Kolmar Group (1998)
Trade accounts receivable (2,334) (2,839)
Other receivables 862 (6,575)
Inventories (1,831) (1,117)
Prepaid expenses and other current assets (1,341) 411
Other assets 316 8,094
Accounts payable 6,962 (2,339)
Accrued expenses and other liabilities (4,242) 8,756
-------- --------
Net cash provided by operating activities 531 3,023
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (503) (368)
Sale of property and equipment 71 28
Acquisition of Kolmar Group, net of cash acquired -- (77,580)
-------- --------
Net cash used in investing activities (432) (77,920)
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS ENDED APRIL 3, 1999 AND MARCH 28, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------
APRIL 3, MARCH 28,
1999 1998
---------- --------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing acquisition $ -- $ (11,482)
Net (repayments) borrowing on revolving loans -- (12,639)
Repayments of long term debt -- (17,125)
Borrowing on senior subordinated notes -- 105,000
Borrowing on senior bridge loan -- 70,000
Repayment of senior bridge loan -- (70,000)
Dividends on preferred stock (9) --
Repayment of senior subordinated debt -- (6,000)
Proceeds from issuance of common stock -- 20,930
Repurchase of management stock (124) --
---------- ---------
Net cash provided by (used in) financing activities (133) 78,684
---------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
426 (240)
---------- ---------
NET INCREASE IN CASH
392 3,547
CASH, beginning of period 8,747 338
---------- ---------
CASH, end of period $ 9,139 $ 3,885
---------- ---------
---------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the quarter for:
Interest $ 6,103 $ 1,685
Income taxes $ 118 $ 212
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Accretion attributable to preferred stock $ 62 $ 62
---------- ---------
---------- ---------
The Company acquired all the capital stock of Kolmar
Group 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.
6
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED APRIL 3, 1999 AND MARCH 28, 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. Such financial statements
should be read in conjunction with the audited financial statements included
in the Company's Annual Report on Form 10-K.
In the opinion of management, the condensed consolidated financial
statements included herein reflect adjustments consisting only of normal
recurring adjustments necessary to present fairly the consolidated financial
position of the Company as of April 3, 1999, the results of its operations
for the three month periods ended April 3, 1999 and March 28, 1998 and its
cash flows for the three month periods ended April 3, 1999 and March 28,
1998. The results of operations for the interim periods are not necessarily
indicative of the results of operations for the full year.
2. NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivatives and Hedging Activities, which the Company
will adopt in fiscal 2000. The Company is currently not involved in derivative
investments or hedging activities.
3. INVENTORIES
Inventories consisted of the following at April 3, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-------------------------
APRIL 3, DECEMBER 31,
1999 1998
--------- -----------
<S> <C> <C>
Raw materials $24,102 $22,700
Work-in-process 4,282 4,235
Finished goods 5,197 4,045
------- -------
33,581 30,980
Less reserve for excess and obsolete inventories (4,210) (3,537)
------- -------
$29,371 $27,443
------- -------
------- -------
</TABLE>
4. CONTINGENCIES
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 Piedmont, ASHC and
Kolmar acquisitions and certain insurance coverages, the Company believes
that the
7
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED APRIL 3, 1999 AND MARCH 28, 1998
(UNAUDITED)
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 or cash flows.
ASHC'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 ASHC, the EPA identified ASHC as one of more than
500 potentially responsible parties (PRPs) for the contamination of Puente
Valley OU. Subsequently, ASHC and 43 other PRPs entered into a consent
agreement to fund certain investigatory work, which work was completed in
1997. The EPA has not 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 ASHC, the sellers (who currently
own the property on which ASHC 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 ASHC's share of liability,
the Company believes, although there can be no assurance, that ASHC's
liability at this site will not be material. In addition, prior to the
Company's acquisition of ASHC, the Los Angeles Regional Water Quality Control
Board (RWQCB) requested that ASHC conduct certain soil and groundwater
investigation and remediation on its property. ASHC has conducted the
requested investigations and the RWQCB has approved ASHC'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.
In October, 1995 a definitive order and claim was asserted and
issued by the U.S. Environmental Protection Agency against the Company as
potentially responsible for the remediation of a super fund site near Port
Jervis, New York for the actual clean-up. The proceedings remain
administrative only, and are not pending as litigation in any U.S. District
Court. The Company reserved for any potential liability that may arise out of
this claim and recorded insurance receivables relating to this claim which it
believes are probable of recovery. At December 31, 1998, the Company had
established accruals in the amount of $14,000,000 to cover various potential
environmental liabilities. The Company had established a reserve of
$8,000,000 for investigation and remediation costs at a site in New York
where Kolmar has been identified by the EPA as a PRP. Remediation has begun,
and the Company believes that the established accruals would be sufficient to
fund Kolmar's liability for this site. At December 31, 1998, the Company had
a long-term receivable totaling $7,750,000 for insurance recoveries or
indemnification for this site which are probable of collection.
Based on the advice of outside counsel, the Company also maintained
an accrual of $5,250,000 as of December 31, 1998 for one other site where
Kolmar may have liability for contamination caused by former operations,
although it has not yet been identified as a PRP and would have certain
indemnification rights for this site. The Company believes, based on a file
review by an independent consultant, that the accrual would be sufficient to
fund all likely remediation costs at the site.
In addition, the Company maintained an accrual at December 31, 1998,
of $750,000 for liability related to off-site waste disposal locations.
Currently, the Company is aware of one such site at which it is likely to
have future liability, and believes that the accrual is sufficient to fund
such expected liabilities.
While it is impossible at this time to determine with certainty the
ultimate outcome of the environ-mental matters referred to above, management
believes that adequate provisions have been made for probable losses with
respect thereto and that the ultimate outcome, after provisions therefore,
will not have a material adverse effect on the combined financial position of
the Company. 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--There are certain other legal proceedings and claims
pending against the Company arising out of the normal course of business
which claims for monetary damages are asserted. While it is not feasible to
predict the outcome of these legal
8
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED APRIL 3, 1999 AND MARCH 28, 1998
(UNAUDITED)
proceedings and claims with certainty, management is of the belief that any
ultimate liabilities will not individually or in the aggregate have a
material adverse effect on the Company's financial position or results of
operations.
5. SUBSEQUENT EVENTS
In April, 1999, a subsidiary of the Company (Kolmar Canada, Inc.)
acquired certain of the operating assets of Bradcan Corporation for
approximately $700,000. This acquisition will be accounted for as a purchase.
In April, 1999, the Company entered into a stock purchase agreement
to acquire a contract manufacturer for approximately $8.5 million. This
acquisition is subject to the successful completion of the current ongoing
due diligence review.
6. SUPPLEMENTAL GUARANTOR INFORMATION
The payment obligations of the Company under the Notes are
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
condensed combined balance sheets as of April 3, 1999 and the condensed
combined statements of operations and cash flows for the three month period
ended April 3, 1999 of the Guarantors, representing Kolmar, ASC and Piedmont
and the non-guarantors which consist of Kolmar Canada, 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 non-guarantor
operations of the Company, based on amounts derived from the financial
statements of the Company and of the Kolmar Group, for the three month period
ended April 3, 1999.
9
<PAGE>
CONDENSED COMBINED BALANCE SHEET AT APRIL 3, 1999 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED CONSOLIDATED
GUARANTORS NONGUARANTORS OSG ELIMINATIONS TOTAL
----------- -------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current Assets:
Cash, cash equivalents and short-term investments $ 7,524 $ 1,867 $ 1 $ -- $ 9,392
Accounts receivable, net 30,777 3,842 -- -- 34,619
Other receivables 1,425 252 (1,099) -- 578
Inventories 26,284 3,087 -- -- 29,371
Prepaid expenses and other current assets 4,671 232 188 -- 5,091
--------- --------- --------- --------- ---------
Total current assets 70,681 9,280 (910) -- 79,051
Property and equipment, net 27,396 3,835 -- -- 31,231
Goodwill, net 65,127 5,713 -- -- 70,840
Intercompany receivable (payable) (16,915) (2,691) 19,606 -- --
Investment in subsidiaries -- -- 71,224 (71,224) --
Other long-term assets 12,711 -- 7,289 -- 20,000
--------- --------- --------- --------- ---------
Total Assets $ 159,000 $ 16,137 $ 97,209 $ (71,224) $ 201,122
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 32,021 $ 2,514 $ -- $ -- $ 34,535
Other current liabilities 11,512 1,170 1,182 -- 13,864
--------- --------- --------- --------- ---------
Total current liabilities 43,533 3,684 1,182 -- 48,399
Long-term debt, less current portion -- -- 105,000 -- 105,000
Other liabilities 17,600 -- (216) -- 17,384
Intercompany loan 31,967 11,578 (43,545) -- --
Redeemable preferred stock -- -- 4,522 -- 4,522
Stockholders' equity 65,900 875 30,266 (71,224) 25,817
--------- --------- --------- --------- ---------
Total Liabilities, Redeemable $ 159,000 $ 16,137 $ 97,209 $ (71,224) $201,122
Preferred Stock and Stockholders' Equity --------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
10
<PAGE>
CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 3, 1999
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED CONSOLIDATED
GUARANTORS NONGUARANTORS OSG ELIMINATIONS TOTAL
---------- ------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 59,609 $ 4,637 $ -- $ 523 $ 63,723
Cost of goods sold 51,163 3,690 -- (523) 54,330
-------- -------- -------- -------- --------
Gross profit 8,446 947 -- -- 9,393
Selling, general and administrative
expense 5,316 565 133 -- 6,014
-------- -------- -------- -------- --------
Income (loss) from operations 3,130 382 (133) -- 3,379
Interest expense, net 3,005 227 156 -- 3,388
Income (loss) before provision for
income taxes 125 155 (289) -- (9)
Provision (benefit) for income taxes 105 46 95 -- 246
-------- -------- -------- -------- --------
Net income (loss) $ 20 $ 109 $ (384) $ -- $ (255)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
11
<PAGE>
CONDENSED COMBINED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED
APRIL 3, 1999
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CONSOLIDATED
GUARANTORS NONGUARANTORS OSG ELIMINATIONS TOTAL
---------- ------------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income, (loss) $ 18 $ 106 $ (379) $ -- $ (255)
Total adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities (1,109) 1,383 512 -- 786
---------- ----------- ------- ----------- ----------
Net cash provided by (used in) operating activities (1,091) 1,489 133 -- 531
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (488) (15) -- -- (503)
Sales of property, plant or equipment, net 71 -- -- 71
---------- ----------- ------- ----------- ----------
Net cash used in investing activities (417) (15) -- -- (432)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of Dividends -- -- (9) -- (9)
Proceeds from cash received from
management stock -- -- (124) -- (124)
---------- ----------- ------- ----------- ----------
Net cash used in financing activities -- -- (133) -- (133)
Effect of exchange rate changes on cash -- 426 -- -- 426
---------- ----------- ------- ----------- ----------
Net increase in cash (1,508) 1,900 -- -- 392
Cash, beginning of period 8,568 178 1 -- 8,747
---------- ----------- ------- ----------- ----------
Cash, end of period $ 7,060 $ 2,078 $ 1 $ -- $ 9,139
---------- ----------- ------- ----------- ----------
---------- ----------- ------- ----------- ----------
</TABLE>
12
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED APRIL 3, 1999 AND MARCH 28, 1998
(UNAUDITED)
7. BUSINESS SEGMENT INFORMATION
The Company operates predominantly in one business segment. The company
provides contract manufacturing for consumer products manufacturers and
distributors in the health and beauty aids, colored cosmetics, aerosol products
such as high-end hair spray and shaving creams and gels. With the acquisition of
the Kolmar Group, the Company has operating facilities in the U.S., Mexico and
Canada.
Net revenues, income from operations, identifiable assets and
depreciation and amortization by geographic region for the three months ended
April 3, 1999, are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
--------------------------------------
UNITED
STATES MEXICO CANADA OTHER TOTAL
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues ................ $ 59,096 $ 2,668 $ 1,959 $ -- $ 63,723
Income from operations ...... 2,993 253 185 (52) 3,379
Identifiable assets ......... 184,986 4,742 10,584 810 201,122
Depreciation and amortization 1,880 59 19 4 1,962
</TABLE>
Net revenues, income from operations, identifiable assets and
depreciation and amortization by geographic region for the three months ended
March 28, 1998, are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
--------------------------------------
UNITED
STATES MEXICO CANADA OTHER TOTAL
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues ................ $ 49,706 $ 1,367 $ 1,667 $ 1,135 $ 53,875
Income from operations ...... 3,205 31 21 (229) 3,028
Identifiable assets ......... 177,351 3,884 4,048 4,684 189,967
Depreciation and amortization 1,785 67 28 50 1,930
</TABLE>
13
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS.
GENERAL
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, such
as colored cosmetics, lipsticks, facial powders, 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.
RESULTS OF OPERATIONS
For the three months ended April 3, 1999 compared to the three months ended
March 28, 1998.
NET REVENUE. Net revenues increased by approximately $9.8 million, or
18% to $63.7 million for the three month period ended April 3, 1999 from $53.9
million for the three month period ended March 28, 1998. The increase was
primarily attributable to the increase in new contracts for the color cosmetic
production and services.
14
<PAGE>
COST OF GOODS SOLD. Cost of goods sold increased by approximately $8.4
million, or 18% to $54.3 million for the three month period ended April 3, 1999
from $45.9 million for the three month period ended March 28, 1998. Total cost
of goods sold, as a percentage of sales, increased slightly to 85.3% for the
three month period ended April 3, 1999 from 85.1% for the three month period
ended March 28, 1998. This was primarily due to the continuing shift towards
increased full service, including purchasing more raw materials for the customer
at ASC and the increase in new color cosmetic production contracts.
SG&A EXPENSES. Selling, general and administrative expenses ("SG&A")
increased approximately by $1.0 million or 21% to $6.0 million for the three
month period ended April 3, 1999 from $5.0 million for the three month period
ended March 28, 1998. The increase was primarily attributable to the additional
selling, marketing and administrative infrastructure expenses. As a percentage
of net revenues, SG&A increased to 9.4% for the three month period ended April
3, 1999 from 9.2% for the three month period ended March 28, 1998.
INTEREST EXPENSE. Interest expense increased $.6 million, or 20% to
$3.4 million for the three month period ended April 3, 1999 from $2.8 million
for the three month period ended March 28, 1998. Average debt for the three
month period ended April 3, 1999 was $105.0 million versus average debt of
$78.3 million for the three months ended March 28, 1998, an average increase
of $26.7 million. The increase in interest expense was primarily
attributable to the increase in total indebtedness.
LIQUIDITY AND CAPITAL RESOURCES
As of April 3, 1999, OSG had cash and cash equivalents of $9.1 million,
working capital of $30.7 million and long-term debt of $105.0 million. The
primary sources of cash were from operating activities. Cash provided by
operations was $.5 million and $3.0 million for the three month period ended
April 3, 1999 and March 28, 1998, respectively. Principal uses of cash were for
capital expenditures, and interest payments. During the three month period ended
April 3, 1999, there were no borrowings and repayments under the Company's
working capital facilities.
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 expenses, were 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.
The Company anticipates that its primary uses of working capital in
future periods will be to service its 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 regularly examines opportunities for strategic
acquisitions or other companies or lines of business. The Company historically
has financed its acquisitions through a combination of borrowings under bank
credit facilities, seller provided financing, internally generated cash flows
and the issuance of equity and debt securities and anticipates that it may from
time to time issue additional debt and/or equity securities either as direct
consideration for such acquisitions or to raise additional funds to be used (in
whole or in part) in payment for acquired businesses or assets. There can be no
assurance as to whether or when any acquired business would contribute positive
operating results commensurate with the associated acquisition cost.
The Company believes that cash on hand, cash flow from operations and
available borrowings under the 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 replacements of existing assets and
new customer requirements.
The Company regularly examines opportunities for strategic acquisitions
of other companies or lines of businesses and anticipates that it may from time
to time issue additional debt and/or equity securities either as direct
consideration for such
15
<PAGE>
acquisitions or to raise additional funds to be used (in whole or in part) in
payment for acquired securities or assets. The issuance of such securities could
be expected to have a dilutive impact on the Company's shareholders, and there
can be no assurance as to whether or when any acquired business would contribute
positive operating results commensurate with the associated investment.
CERTAIN TRENDS AND UNCERTAINTIES
Historically, the Company has grown its business through acquisitions
and investments in its operations. The Company intends to continue during 1999
to make significant investments in the growth of its business and to examine
opportunities for additional growth through acquisitions and strategic
investments. The impact of these decisions on future profitability cannot be
predicted with any certainty. The Company's commitment to growth may increase
its vulnerability to unforeseen downturns in its markets and shifts in
competitive conditions. However, the Company believes that significant
opportunities exist in the markets for each of its product lines and services,
and continued investment in its marketing and sales capabilities and product
development will enhance its opportunities for long term growth and
profitability.
YEAR 2000 COMPLIANCE
GENERAL DESCRIPTION
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Many of the
Company's computer programs that have time sensitive software may recognize a
date using "00" as the year 1900 rather than 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
This discussion of the implications of the Year 2000 issue contains
numerous forward-looking statements based on inherently uncertain information.
The cost of the Company's project to address the Year 2000 issue and the date on
which the Company plans to complete its internal Year 2000 modifications are
based on management's best estimates of future events. The material assumptions
underlying the estimated costs are the continued availability of internal and
external resources, the cost of these resources, the time required to accomplish
the tasks, and the cost of needed equipment. The Company cannot guarantee,
however, that it will achieve these estimates, and actual results could differ.
Moreover, although management believes it will be able to make the necessary
modifications in advance, failure to modify the systems may have a material
effect on the Company.
Readiness Preparation
The Company is preparing for the century change with a comprehensive
enterprise-wide Year 2000 program. The Company has identified all of the major
systems susceptible to the Year 2000 problem and has sought external and
internal resources to renovate and test the systems. The Company is testing
purchased software, internally developed systems and systems supported by
external parties as part of the program. The Company is evaluating customers and
vendors that have significant relationships with it to determine whether they
are adequately preparing for the year 2000. In addition, the Company is
developing contingency plans to reduce the impact of some potential events that
may occur. The Company cannot guarantee, however, that the systems of vendors or
customers with whom the Company does business will be completed on a timely
basis, or that contingency plans will shield operations from failures that may
occur.
The Company plans to complete all currently identified Year 2000 issues
prior to the year 2000, with special emphasis placed on those systems vital to
the continuance of a broad core of business activity. The Company's Year 2000
project (the "Project") is divided into three major sections--infrastructure,
applications software, and third-party suppliers and customers. The general
phases common to all sections are (i) inventorying Year 2000 items; (ii)
assigning priorities to identified items; (iii) assessing the Year 2000
compliance of items determined to be material to the Company; (iv) repairing or
replacing material items that are determined not to be Year 2000 compliant; and
(v) designing and implementing contingency and business continuation plans.
Material items are those believed by the Company to have a risk involving the
safety of individuals, or that may cause damage to property or the environment,
or affect revenues.
16
<PAGE>
As of April 3, 1999, the inventory, assigning of priorities and
assessing Year 2000 compliance of material items phases of each section of the
Project had been completed. The Company is in the process of repairing and
replacing material items that are not Year 2000 compliant. The Company is also
designing and implementing contingency plans.
The infrastructure section consists of hardware and operating software
other than applications software. This section is on schedule to be completed by
the year 2000, and as of April 3, 1999, approximately 50% of the activities
related to this section had been completed. The Company's manufacturing
facilities located in Port Jervis, Mexico, and Corona are fully Year 2000
compliant.
The applications software section consists of inventory, financial and
other similar software. This section is in the process of converting
applications software that is not Year 2000 compliant and, where available from
the supplier, the replacement of such software. The Company estimates that this
category was approximately 50% completed as of April 3, 1999, and will be
completed by the Year 2000.
Approximately 50% of the Company's hardware and software critical to
the continuance of its business was Year 2000 compliant as of April 3, 1999. The
Company estimates that it will be fully Year 2000 compliant by the fourth
quarter of 1999.
The third-party suppliers and customers section involves identifying
and reviewing the Company's customers and vendors and determining their Year
2000 readiness. To date, the Company has identified approximately 615 vendors
and has made inquiries about their Year 2000 readiness plans and status. To
date, approximately 585 vendors have responded and those who have responded have
stated that they will be Year 2000 compliant by December 31, 1999. Management
does not believe that the inability of vendors, customers, and other third
parties to complete their Year 2000 remediation process in a timely manner will
have a material impact on the financial position or results of operations of the
Company. However, the effect of non-compliance by third parties is not readily
determinable.
RISKS
The principal risks associated with the Year 2000 issue can be grouped
into three categories: (i) the Company's failure to ready its operations for the
next century, (ii) disruption of the Company's operations due to operational
failures of third parties, and (iii) business interruptions among suppliers and
customers such that the Company's operations would be adversely affected. The
only risk largely under the Company's control is preparing its internal
operations for the Year 2000. The Company is heavily dependent on its computer
systems. The complexity of these systems and their interdependence make it
impractical to convert to alternative systems without interruptions if necessary
modifications are not completed on schedule. Management believes that the
Company will be able to make the necessary modifications prior to the year 2000.
Failure of the Company's third party suppliers and customers to address
their Year 2000 issues may jeopardize the Company's operations, but the
seriousness of this risk depends on the nature and duration of the failures. The
most serious impact on the Company's operations from vendors would result if
basic services such as telecommunications, electric power, and services provided
by other financial institutions and governmental agencies were disrupted. The
Company is unable to estimate the likelihood of significant disruptions among
its basic infrastructure suppliers. In view of the unknown probability of
occurrence and impact on operations, the Company considers the loss of basic
infrastructure services to be the most reasonably likely worst case Year 2000
scenario.
CONTINGENCY PLANS
The Company has contingency plans for certain critical applications and
is working on such plans for others. The contingency plans will address
disruptions in the Company's computer systems, obtaining alternative suppliers,
dealing with inventory disruptions, and addressing customer problem issues.
How-ever, there can be no assurance that such plans will have the necessary
remedial effect.
17
<PAGE>
COSTS
In the three months ended April 3, 1999, the Company's total
expenditures on Year 2000 compliance was $5,000. Plans are in place to bring all
of the Company's systems into compliance by December 31, 1999, with a total cost
estimated to be in the range of $200,000-$300,000. Management believes that the
costs of the Year 2000 project will not have a material effect on its results of
operations, financial condition or cash flows. The Company is funding the costs
of the Year 2000 project with normal operating cash and is staffing it with
external resources as well as internal staff redeployed from less time-sensitive
assignments. Estimated total costs could change further as analysis continues.
FORWARD LOOKING STATEMENTS
Certain statements and information contained or incorporated by
reference in this report contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act, which represent the Company's
expectations or beliefs, including but not limited to, statements concerning
industry performance, the Company's operations, performance, financial
condition, growth and acquisition strategies, margins and growth in sales of the
Company's products and services. For this purpose, any statements contained in
this Form 10-Q and the Company's Form 10-K, that are not statements of
historical fact may be deemed to be forward-looking statements. Such statements
can be identified by the use of forward-looking terminology such as "believes,"
"expects," "intends," "may," "will," "should," or "anticipates," or the negative
therefore, other variations thereon or comparable terminology, or by discussions
of strategy. No assurances can be given that the future results covered by the
forward-looking statements will be achieved. These statements by their nature
involve substantial risks and uncertainties, certain of which are beyond the
Company's control.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which 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 and economic business conditions, both domestic and foreign;
industry and market capacity; fashion industry changes; the impact of the Year
2000 issue, the estimated costs associated with becoming Year 2000 compliant and
the estimated target date for substantial completion of remediation; wage rates;
existing government regulations and changes in, or failure to comply with,
government regulations; liabilities 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 or retain qualified
personnel; the significant indebted-ness of the Company; the availability and
terms of capital to fund the expansion of the Company's business; and other
factors referenced in this Form 10-Q and the Company's Form 10-K, copies of
which may be obtained from the Company without cost.
18
<PAGE>
PART II
OTHER INFORMATION
-----------------
<TABLE>
<S> <C>
Item 1. Legal Proceedings
See Part I, Item 1, Notes to Condensed Consolidated Financial
Statements, Note 4, "Contingencies".
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
(a) EXHIBIT INDEX
-------------
<TABLE>
ITEM
NUMBER EXHIBIT PAGE
------ ------- -----
<S> <C> <C>
11. Statement of computation of basic
and diluted net income per share
27. Financial data schedule Filed electronically
</TABLE>
(b) REPORTS ON FORM 8-K
-------------------
None.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OUTSOURCING SERVICES GROUP, INC.
Dated: May 14, 1999 /s/ CHRISTOPHER DENNEY
------------------------------------------
Christopher Denney
Chief Executive Officer, President
and Director (Principal Executive Officer)
Dated: May 14, 1999 /s/ PERRY MORGAN
------------------------------------------
Perry Morgan
Chief Financial Officer (Acting)
and Assistant Secretary
(Principal Financial and
Accounting Officer)
20
<PAGE>
EXHIBIT 11.
OUTSOURCING SERVICES GROUP, INC.
STATEMENT OF COMPUTATION OF BASIC AND DILUTED
NET LOSS PER SHARE
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Exhibit 11.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
APRIL 3, MARCH 28,
1999 1998
----------- ------------
<S> <C> <C>
Basic loss per share:
Net loss attributable to common stockholders $ (317) $ (3,071)
----------- ------------
----------- ------------
Weighted average number of outstanding common shares 3,453,366 3,178,438
----------- ------------
----------- ------------
Basic loss per share $ (0.09) $ (0.97)
----------- ------------
----------- ------------
Diluted loss per share:
Net loss $ (317) $ (3,071)
----------- ------------
----------- ------------
Weighted average number of outstanding common shares
assuming full dilution 3,453,366 3,178,438
----------- ------------
----------- ------------
Diluted loss per share $ (0.09) $ (0.97)
----------- ------------
----------- ------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> APR-03-1999
<CASH> 9,392
<SECURITIES> 0
<RECEIVABLES> 36,337
<ALLOWANCES> (1,718)
<INVENTORY> 29,371
<CURRENT-ASSETS> 79,051
<PP&E> 33,193
<DEPRECIATION> (1,962)
<TOTAL-ASSETS> 201,122
<CURRENT-LIABILITIES> 48,399
<BONDS> 0
0
4,522
<COMMON> 32,143
<OTHER-SE> (6,326)
<TOTAL-LIABILITY-AND-EQUITY> 201,122
<SALES> 63,723
<TOTAL-REVENUES> 63,723
<CGS> 54,330
<TOTAL-COSTS> 6,014
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,388
<INCOME-PRETAX> (9)
<INCOME-TAX> 246
<INCOME-CONTINUING> (255)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (255)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
