<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED OCTOBER 2, 1999 COMMISSION FILE
NUMBER: 333-57209
------------------------
OUTSOURCING SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
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 November 2, 1999: 3,441,983 shares.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
INDEX TO FORM 10-Q
PART I. Financial Information
ITEM 1. Financial Statements
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
Condensed Consolidated Balance Sheets as of December 31,
1998 and October 2, 1999 (unaudited)........................ 3
Condensed Consolidated Statements of Operations for the
Three and Nine Month Periods Ended September 26, 1998
(unaudited) and October 2, 1999 (unaudited)................. 4
Condensed Consolidated Statements of Cash Flows for the Nine
Month Periods Ended September 26, 1998 (unaudited) and
October 2, 1999 (unaudited)................................. 5
Notes to Condensed Consolidated Financial Statements
(unaudited)................................................. 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
PART II. Other Information........................................... 20
Item 1. Legal Proceedings........................................... 20
Item 2. Changes in Securities....................................... 20
Item 3. Defaults Upon Senior Securities............................. 20
Item 4. Submission of Matters to a Vote of Security Holders......... 20
Item 5. Other Information........................................... 20
Item 6. Exhibits and Reports on Form 8-K............................ 20
SIGNATURES............................................................ 21
EXHIBITS
</TABLE>
2
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND OCTOBER 2, 1999
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 2,
1998 1999
------------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 8,747 $ 1,586
Short-term investments.................................... 253 250
Accounts receivable, net.................................. 32,244 41,024
Other receivables......................................... 870 1,345
Inventories, net (Note 3)................................. 27,443 37,184
Prepaid expenses and other current assets................. 556 1,558
Deferred income taxes, net................................ 3,931 3,931
-------- --------
Total current assets.......................... 74,044 86,878
PROPERTY AND EQUIPMENT, net................................. 31,743 32,549
GOODWILL, net............................................... 71,554 77,612
DEFERRED FINANCING COSTS, net............................... 7,714 6,739
ENVIRONMENTAL INSURANCE RECEIVABLE.......................... 7,750 7,750
DUE FROM CCL................................................ 3,376 3,376
OTHER ASSETS................................................ 1,500 1,277
-------- --------
Total assets.................................. $197,681 $216,181
======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable.................................... $ 27,429 $ 31,207
Accrued expenses.......................................... 16,930 15,120
Deferred taxes............................................ -- 448
Other current liabilities................................. 930 805
-------- --------
Total current liabilities..................... 45,289 47,580
DEFERRED INCOME TAXES, net.................................. 1,275 1,275
ENVIRONMENTAL CONTINGENCIES AND OTHER LIABILITIES........... 15,990 15,975
LONG-TERM DEBT.............................................. 105,000 120,591
-------- --------
Total liabilities............................. 167,554 185,421
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................. 4,094 4,251
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 6,000,000 shares
authorized; 3,455,174 shares issued and outstanding as
of December 31, 1998 and 3,441,983 as of October 2,
1999.................................................... 3 3
Common stock warrants..................................... 663 663
Additional paid-in capital................................ 32,272 32,140
Notes receivable from stockholders........................ (772) (764)
Accumulated deficit....................................... (6,584) (6,275)
Accumulated other comprehensive income.................... 76 367
-------- --------
Total stockholders' equity.................... 25,658 26,134
-------- --------
Total liabilities, redeemable preferred stock
and stockholders' equity.................... $197,681 $216,181
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED
SEPTEMBER 26, 1998 AND OCTOBER 2, 1999
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 26, OCTOBER 2, SEPTEMBER 26, OCTOBER 2,
1998 1999 1998 1999
------------- ---------- ------------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUES....................................... $ 56,214 $ 65,761 $ 171,183 $ 198,458
COST OF GOODS SOLD................................. 47,388 55,105 144,776 167,889
---------- ---------- ---------- ----------
GROSS PROFIT....................................... 8,826 10,656 26,407 30,569
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....... 5,242 7,207 15,659 19,076
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS............................. 3,584 3,449 10,748 11,493
INTEREST EXPENSE, net.............................. 3,146 3,423 9,238 10,095
OTHER EXPENSE (INCOME), net........................ (6) 51 (6) (367)
FOREIGN CURRENCY TRANSLATION LOSS.................. 918 -- 918 --
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAX PROVISION AND
EXTRAORDINARY ITEM............................... (474) (25) 598 1,765
PROVISION FOR INCOME TAXES......................... 490 238 939 1,271
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM............ (964) (263) (341) 494
EXTRAORDINARY ITEM, LOSS FROM EARLY EXTINGUISHMENT
OF DEBT, net of income tax benefit of $997....... -- -- (2,577) --
---------- ---------- ---------- ----------
NET INCOME (LOSS).................................. $ (964) $ (263) $ (2,918) $ 494
========== ========== ========== ==========
ACCRETION OF PREFERRED STOCK....................... (34) (53) (158) (157)
PREFERRED STOCK DIVIDENDS.......................... 1 (9) (18) (28)
---------- ---------- ---------- ----------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS..................................... $ (997) $ (325) $ (3,094) $ 309
========== ========== ========== ==========
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment.......... 189 (368) (275) 291
---------- ---------- ---------- ----------
COMPREHENSIVE INCOME (LOSS)........................ $ (775) $ (631) $ (3,193) $ 785
========== ========== ========== ==========
EARNINGS PER SHARE:
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM.......... $ (0.28) $ (0.08) $ (0.10) $ 0.14
INCOME (LOSS) FROM EXTRAORDINARY
ITEM........................................... -- -- (0.78) --
---------- ---------- ---------- ----------
NET INCOME (LOSS) PER SHARE:
--Basic.......................................... $ (0.28) $ (0.08) $ (0.88) $ 0.14
--Diluted........................................ $ (0.28) $ (0.08) $ (0.88) $ 0.14
========== ========== ========== ==========
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
--Basic.......................................... $ (0.29) $ (0.09) $ (0.94) $ 0.09
--Diluted........................................ $ (0.29) $ (0.09) $ (0.94) $ 0.09
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
--Basic.......................................... 3,383,924 3,441,983 3,296,389 3,444,914
--Diluted........................................ 3,383,924 3,441,983 3,296,389 3,583,414
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 26, 1998 AND OCTOBER 2, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 26, OCTOBER 2,
1998 1999
-------------- -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $(2,918) $ 494
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 6,174 6,128
Amortization of deferred financing costs.................. 569 975
Provision for doubtful accounts........................... 192 608
Extraordinary item -- loss from early extinguishment of
debt.................................................... 3,574 --
Deferred income taxes..................................... 1,262 --
Change in operating assets and liabilities, net of effect
of the acquisitions of Kolmar Group (1998) and Acupac
and Bradcan Corporation (1999):
Trade accounts receivable............................... 105 (7,175)
Other receivable........................................ 249 (429)
Inventories............................................. (2,305) (7,423)
Prepaid expenses and other current assets............... -- (574)
Other assets............................................ 170 (176)
Accounts payable........................................ 209 2,092
Accrued expenses and other liabilities.................. 166 (3,768)
------- -------
Net cash provided by (used in) operating
activities........................................ 7,447 (9,248)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (1,791) (3,128)
Sale of property, plant and equipment....................... 31 262
Other....................................................... (1,180) --
Acquisition of Kolmar Group, net of cash acquired (1998) and
acquisitions of Acupac and Bradcan, net of cash acquired
(1999).................................................... (76,630) (10,530)
------- -------
Net cash used in investing activities............... (79,570) (13,396)
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 26, 1998 AND OCTOBER 2, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 26, OCTOBER 2,
1998 1999
-------------- -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing acquisition.............................. $(10,265) $ --
Net (repayments) borrowing on revolving loans............... (10,441) 15,591
Borrowing payable to former competitor...................... 100 --
Repayment of debt due affiliate............................. (2,332) --
Repayments of long-term debt................................ (19,750) --
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................................ (18) (28)
Repayment of senior subordinated debt....................... (6,000) --
Proceeds from issuance of common stock...................... 21,108 --
Repurchase of management stock.............................. -- (124)
-------- -------
Net cash provided by financing activities........... 77,402 15,439
-------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... 0 44
-------- -------
NET INCREASE (DECREASE) IN CASH............................. 5,279 (7,161)
CASH, beginning of period................................... 338 8,747
-------- -------
CASH, end of period......................................... $ 5,617 $ 1,586
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid year to date for:
Interest............................................ $ 6,741 $12,296
Income taxes........................................ $ 212 $ 1,015
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Accretion attributable to preferred stock................. $ 158 $ 157
======== =======
The Company acquired all the capital stock of Kolmar Group
(1998) and Acupac Packaging (1999) and certain assets of
Bradcan Corporation (1999). In conjunction with the
acquisitions, liabilities were assumed as follows:
Fair value of assets acquired......................... $ 63,358 $ 5,390
Intangible assets acquired............................ 51,277 8,506
Cash paid for capital stock........................... (77,951) (9,733)
Cash paid for assets.................................. -- (797)
-------- -------
Liabilities assumed................................... $ 36,684 $ 3,366
======== =======
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 26, 1998 AND OCTOBER 2, 1999
(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.
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 October 2, 1999, the results of its operations for
the three and nine month periods ended September 26, 1998 and October 2, 1999,
and its cash flows for the nine month periods ended September 26, 1998 and
October 2, 1999. 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. The FASB amended this
pronouncement in June 1999 to defer the effective date until the Company's
fiscal year 2001. Management is currently evaluating the impact of the adoption
of SFAS No. 133 on the consolidated financial statements.
3. INVENTORIES
Inventories consisted of the following at December 31, 1998 and October 2,
1999:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 2,
1998 1999
------------- -----------
(IN THOUSANDS)
<S> <C> <C>
Raw materials......................................... $22,700 $29,875
Work-in-process....................................... 4,235 5,241
Finished goods........................................ 4,045 5,618
------- -------
30,980 40,734
Less reserve for excess and obsolete inventories...... (3,537) (3,550)
------- -------
$27,443 $37,184
======= =======
</TABLE>
4. 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 also has
equipment under operating leases having terms from 3 to 10 years.
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
7
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 26, 1998 AND OCTOBER 2, 1999
(UNAUDITED)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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, Aerosol Services Holding
Corporation ("ASHC") and Kolmar acquisitions 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 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 offsets 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 offset 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 October 2, 1999, 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
will be sufficient to fund Kolmar's liability for this site. At October 2, 1999,
the Company had a long-term
8
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 26, 1998 AND OCTOBER 2, 1999
(UNAUDITED)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 October 2, 1999 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 October 2, 1999, 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 environmental 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 consolidated 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 existing provisions, they will be charged to income in the
future.
LITIGATION--There are certain other legal proceedings and claims including
product liability, 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 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 and that adequate provisions have
been made for such liabilities.
In September 1999, the Company agreed in principle to a settlement of
$1,000,000 with a customer for a product liability claim against its Piedmont
Laboratories subsidiary which relates to actions taken prior to the acquisition
of the subsidiary by the Company. The Company charged the settlement to
operating expenses in the third quarter of 1999. Costs to defend this claim
amounted to $566,000 in 1999 and were charged to operating expenses primarily in
the first and second quarters of 1999.
5. BUSINESS ACQUISITIONS
In April 1999, a subsidiary of the Company (Kolmar Canada, Inc.) acquired
certain of the operating assets of Bradcan Corporation for approximately
$800,000. This acquisition was accounted for as a purchase.
On June 2, 1999, the Company acquired all of the issued and outstanding
capital stock of Acupac Packaging, Inc. ("Acupac"), for approximately $10.0
million. Acupac is primarily a provider of outsourced packaging services to the
health and beauty aids, household and consumer product markets. This acquisition
was accounted for as a purchase.
9
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 26, 1998 AND OCTOBER 2, 1999
(UNAUDITED)
6. SUPPLEMENTAL GUARANTOR INFORMATION
The payment obligations of the Company under the Senior Subordinated Notes
(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
consolidating balance sheets as of October 2, 1999 and the condensed
consolidating statements of operations and cash flows for the nine month period
ended October 2, 1999 of the Guarantors, representing Kolmar, ASC, Piedmont and
Acupac 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 nine month period ended October 2,
1999.
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF OCTOBER 2, 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............................ $ 1,311 $ 524 $ 1 $ -- $ 1,836
Accounts receivable, net................. 35,812 5,212 -- -- 41,024
Other receivables........................ 945 373 27 -- 1,345
Inventories.............................. 33,152 4,032 -- -- 37,184
Prepaid expenses and other current
assets................................. 4,859 442 188 -- 5,489
-------- ------- -------- -------- --------
Total current assets..................... 76,079 10,583 216 -- 86,878
Property and equipment, net.............. 28,299 4,211 39 -- 32,549
Goodwill, net............................ 71,327 6,285 -- -- 77,612
Intercompany receivable (payable)........ (4,068) (5,181) 9,249 -- --
Investment in subsidiaries............... -- -- 81,299 (81,299) --
Other long-term assets................... 12,463 40 6,639 -- 19,142
-------- ------- -------- -------- --------
Total Assets............................. $184,100 $15,938 $ 97,442 $(81,299) $216,181
======== ======= ======== ======== ========
LIABILITIES:
Current Liabilities:
Accounts payable......................... $ 28,521 $ 2,686 $ -- $ -- $ 31,207
Other current liabilities................ 14,121 1,184 1,068 -- 16,373
-------- ------- -------- -------- --------
Total current liabilities................ 42,642 3,870 1,068 -- 47,580
Long-term debt, less current portion..... 15,591 -- 105,000 -- 120,591
Other liabilities........................ 17,466 -- (216) -- 17,250
Intercompany loan........................ 32,661 10,884 (43,545) -- --
Redeemable preferred stock............... -- -- 4,626 -- 4,626
Stockholders' equity..................... 75,740 1,184 30,509 (81,299) 26,134
-------- ------- -------- -------- --------
Total Liabilities, Redeemable
Preferred Stock and Stockholders'
Equity................................. $184,100 $15,938 $ 97,442 $(81,299) $216,181
======== ======= ======== ======== ========
</TABLE>
10
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 26, 1998 AND OCTOBER 2, 1999
(UNAUDITED)
6. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTH PERIOD ENDED OCTOBER 2, 1999
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED CONSOLIDATED
GUARANTORS NONGUARANTORS OSG ELIMINATIONS TOTAL
---------- ------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net revenues......................... $181,735 $17,524 $ -- $(801) $198,458
Cost of goods sold................... 154,091 14,599 -- (801) 167,889
-------- ------- ------- ----- --------
Gross profit......................... 27,644 2,925 -- -- 30,569
Selling, general and administrative
expenses........................... 22,785 1,735 (5,444) -- 19,076
-------- ------- ------- ----- --------
Income from operations............... 4,859 1,190 5,444 -- 11,493
Interest expense, net................ 3,792 661 5,642 -- 10,095
Other expense (income), net.......... -- (367) -- -- (367)
-------- ------- ------- ----- --------
Income (loss) before provision for
income taxes....................... 1,067 896 (198) -- 1,765
Provision (benefit) for income
taxes.............................. 1,300 150 (179) -- 1,271
-------- ------- ------- ----- --------
Net income (loss).................... $ (233) $ 746 $ (19) $ -- $ 494
======== ======= ======= ===== ========
</TABLE>
11
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 26, 1998 AND OCTOBER 2, 1999
(UNAUDITED)
6. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTH PERIOD ENDED OCTOBER 2, 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).................... $ (233) $ 746 $ (19) $ -- $ 494
Total adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating
activities......................... (11,733) 1,781 (9,865) 10,075 (9,742)
-------- ------- ------- -------- -------
Net cash provided by (used in)
operating activities............... (11,966) 2,527 (9,884) 10,075 (9,248)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures................. (2,390) (699) (39) -- (3,128)
Acquisition of Acupac Packaging, net
of cash............................ (9,733) -- -- -- (9,733)
Acquisition of Bradcan Corporation... -- (797) -- -- (797)
Sales of property, plant or
equipment, net..................... 79 183 -- -- 262
-------- ------- ------- -------- -------
Net cash used in investing
activities......................... (12,044) (1,313) (39) -- (13,396)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowing on revolving loans..... 15,591 -- -- -- 15,591
Payment of dividends................. -- -- (28) -- (28)
Repurchase of management stock....... -- -- (124) -- (124)
Repayment (borrowing) of debt due
affiliate.......................... 912 (912) 10,075 (10,075) --
-------- ------- ------- -------- -------
Net cash provided by (used in)
financing activities............... 16,503 (912) 9,923 (10,075) 15,439
EFFECT OF EXCHANGE RATE CHANGES ON
CASH............................... -- 44 -- -- 44
-------- ------- ------- -------- -------
NET INCREASE (DECREASE) IN CASH...... (7,507) 346 -- -- (7,161)
CASH, beginning of period............ 8,568 178 1 -- 8,747
-------- ------- ------- -------- -------
CASH, end of period.................. $ 1,061 $ 524 $ 1 $ -- $ 1,586
======== ======= ======= ======== =======
</TABLE>
12
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 26, 1998 AND OCTOBER 2, 1999
(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, color cosmetics, aerosol products
such as high-end hair spray and shaving creams and gels. 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 nine and three month periods ended
October 2, 1999, are as follows:
<TABLE>
<CAPTION>
NINE MONTH PERIOD
----------------------------------------------------
UNITED
STATES MEXICO CANADA OTHER TOTAL
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenues.................................... $180,934 $7,867 $9,657 $ -- $198,458
Income from operations.......................... 10,303 694 417 79 11,493
Identifiable assets............................. 200,243 4,622 10,838 478 216,181
Depreciation and amortization................... 5,640 193 253 42 6,128
</TABLE>
<TABLE>
<CAPTION>
THREE MONTH PERIOD
----------------------------------------------------
UNITED
STATES MEXICO CANADA OTHER TOTAL
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenues.................................... $ 58,409 $2,948 $4,404 $ -- $ 65,761
Income from operations.......................... 2,868 422 136 23 3,449
Identifiable assets............................. 200,243 4,622 10,838 478 216,181
Depreciation and amortization................... 1,940 71 94 33 2,138
</TABLE>
13
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 26, 1998 AND OCTOBER 2, 1999
(UNAUDITED)
7. BUSINESS SEGMENT INFORMATION (CONTINUED)
Net revenues, income from operations, identifiable assets and depreciation
and amortization by geographic region for the nine and three month periods ended
September 26, 1998, are as follows:
<TABLE>
<CAPTION>
NINE MONTH PERIOD
----------------------------------------------------
UNITED
STATES MEXICO CANADA OTHER TOTAL
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenues.................................... $156,298 $4,798 $6,435 $3,652 $171,183
Income from operations.......................... 10,636 466 329 (683) 10,748
Identifiable assets............................. 183,276 (226) 11,183 958 195,191
Depreciation and amortization................... 5,747 212 80 135 6,174
</TABLE>
<TABLE>
<CAPTION>
THREE MONTH PERIOD
----------------------------------------------------
UNITED
STATES MEXICO CANADA OTHER TOTAL
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenues.................................... $ 50,386 $1,728 $2,963 $1,137 $ 56,214
Income from operations.......................... 3,438 238 168 (260) 3,584
Identifiable assets............................. 183,276 (226) 11,183 958 195,191
Depreciation and amortization................... 1,944 68 26 50 2,088
</TABLE>
14
<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 nine and three month periods ended October 2, 1999 compared to the nine
and three month periods ended September 26, 1998.
NET REVENUES. Revenues of $198.5 and $65.8 million for the nine month and
three month periods ended October 2, 1999 increased by approximately $27.3
million (16%) and $9.5 million (17%), respectively, from the prior 1998 periods.
The increases for the nine and three month periods are primarily attributable to
the acquisition of Acupac Packaging and the increase in new contracts for the
color cosmetic production and services.
COST OF GOODS SOLD. Cost of goods sold of $167.9 and $55.1 million for the
nine and three month periods ended October 2, 1999, increased by approximately
$23.1 million (16%) and $7.7 million (16%), respectively, from the prior 1998
periods. Total cost of goods sold, as a percentage of sales, was 85% for the
nine month periods and 84% for the three month periods ended October 2, 1999 and
September 26, 1998. The increase was primarily due to the acquisition of Acupac
Packaging and the increase in new color cosmetic production contracts.
SG&A EXPENSES. Selling, general and administrative expenses ("SG&A") of
$19.1 million and $7.2 million for the nine and three month periods ended
October 2, 1999, increased by approximately $3.4 million (21.8%) and $2.0
million (37.5%), respectively, from the prior 1998 periods. The increase for the
nine and three month periods was primarily attributable to the product liability
claim settlement and related defense costs and additional selling, marketing and
administrative infrastructure expenses. For the nine months ended October 2,
1999, as a percentage of net revenues, SG&A increased to 9.6% from 9.1% for the
same period in 1998. For the three months ended October 2, 1999, SG&A, as a
percentage of sales, increased to 11.0% from 9.3% for the same period in 1998.
Excluding the product liability claim settlement and related defense costs, SG&A
increased by $1.8 million (11.8%) and $0.9 million (17.6%) for the nine and
three month periods ended October 2, 1999, respectively, and SG&A, as a
percentage of net revenues, was 8.8% and 9.4% for the nine and three month
periods ended October 2, 1999, respectively.
INTEREST EXPENSE. Interest expense of $10.1 million and $3.4 million for
the nine and three month periods ended October 2, 1999, increased by
approximately $0.9 million (9.3%) and $0.3 million (8.8%), respectively, from
the prior 1998 periods. The increase in interest expense was primarily
attributable to the Company borrowing under the available credit facilities for
the financing of the acquisition of all of the outstanding capital stock of
Acupac Packaging, Inc.
ADJUSTED EBITDA. Adjusted EBITDA represents the sum of income from
operations and depreciation and amortization and excludes (i) the impact of
foreign currency translation loss of $0.9 million associated with the Company's
Mexican operations which are deemed to be operating in a highly
15
<PAGE>
inflationary environment for the nine months ended September 26, 1998 and (ii)
the product liability claim settlement and associated costs of defense of $1.6
million for the nine months ended October 2, 1999. Adjusted EBITDA increased
$2.3 million or 13% to $19.2 million for the nine month period ended October 2,
1999 compared to the same period in 1998. Adjusted EBITDA increased $1.0 million
or 17% to $6.6 million for the three month period ended October 2, 1999 compared
to the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of October 2, 1999, OSG had cash and cash equivalents of $1.8 million,
working capital of $39.3 million and long-term debt of $120.6 million. The
primary sources of cash were from financing activities. Cash used in operations
was $9.2 million for the nine month period ended October 2, 1999. Cash provided
by operations was $7.4 million for the nine month period ended September 26,
1998. Principal uses of cash were for acquisitions, capital expenditures, and
interest payments. During the nine month period ended October 2, 1999, the
Company borrowed $15.6 million under the 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 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.
16
<PAGE>
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.
17
<PAGE>
As of October 2, 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 October 2, 1999, approximately 100% 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 70% completed as of October 2, 1999, and will be completed by the
Year 2000.
Approximately 85% of the Company's hardware and software critical to the
continuance of its business was Year 2000 compliant as of October 2, 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
18
<PAGE>
alternative suppliers, dealing with inventory disruptions, and addressing
customer problem issues. However, there can be no assurance that such plans will
have the necessary remedial effect.
COSTS
In the nine month period ended October 2, 1999, the Company's total
expenditures on Year 2000 compliance was $41,000. 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.
19
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I, Item 1, Notes to Condensed Consolidated Financial Statements,
Note 4, "Commitments and 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
(a) Exhibit Index
<TABLE>
<CAPTION>
ITEM
NUMBER EXHIBIT PAGE
--------------------- ------- ----
<S> <C> <C>
11. Statement of computation of basic
and diluted net income per share 22
27. Financial data schedule Filed electronically
</TABLE>
(b) Reports on Form 8-K
None.
20
<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.
<TABLE>
<CAPTION>
<S> <C>
/S/ CHRISTOPHER DENNEY
-------------------------------------------
Christopher Denney
Chief Executive Officer, President
and Director (Principal Executive Officer)
Dated: November 3, 1999
/S/ PERRY MORGAN
-------------------------------------------
Perry Morgan
Chief Financial Officer, Vice President
and Secretary
(Principal Financial and
Accounting Officer)
Dated: November 3, 1999
</TABLE>
21
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
STATEMENT OF COMPUTATION OF BASIC AND DILUTED
NET INCOME (LOSS) PER SHARE
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Exhibit 11.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
SEPTEMBER 26, OCTOBER 2, SEPTEMBER 26, OCTOBER 2,
1998 1999 1998 1999
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
BASIC INCOME (LOSS) PER SHARE:
Net income (loss) attributable to common
stockholders............................ $ (997) $ (325) $ (3,094) $ 309
========== ========== ========== ==========
Weighted average number of outstanding
common shares........................... 3,383,924 3,441,983 3,296,389 3,444,914
========== ========== ========== ==========
Basic income (loss) per share............. $ (0.29) $ (0.09) $ (0.94) $ 0.09
========== ========== ========== ==========
DILUTED INCOME (LOSS) PER SHARE:
Net income attributable to common
stockholders............................ $ (997) $ (325) $ (3,094) $ 309
========== ========== ========== ==========
Weighted average number of outstanding
common shares assuming full dilution.... 3,383,924 3,441,983 3,296,389 3,583,414
========== ========== ========== ==========
Diluted income (loss) per share........... $ (0.29) $ (0.09) $ (0.94) $ 0.09
========== ========== ========== ==========
</TABLE>
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> OCT-02-1999
<CASH> 1,586
<SECURITIES> 250
<RECEIVABLES> 43,118
<ALLOWANCES> 2,094
<INVENTORY> 37,184
<CURRENT-ASSETS> 86,878
<PP&E> 59,079
<DEPRECIATION> 26,530
<TOTAL-ASSETS> 216,181
<CURRENT-LIABILITIES> 47,580
<BONDS> 120,591
0
4,626
<COMMON> 32,042
<OTHER-SE> (5,908)
<TOTAL-LIABILITY-AND-EQUITY> 216,181
<SALES> 198,458
<TOTAL-REVENUES> 198,458
<CGS> 167,889
<TOTAL-COSTS> 167,889
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 608
<INTEREST-EXPENSE> 10,095
<INCOME-PRETAX> 1,765
<INCOME-TAX> 1,271
<INCOME-CONTINUING> 494
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 494
<EPS-BASIC> 0.14
<EPS-DILUTED> 0.14
</TABLE>
