<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
<TABLE>
<S> <C>
FOR THE QUARTERLY PERIOD ENDED COMMISSION FILE NUMBER:
JULY 1, 2000 333-57209
</TABLE>
------------------------
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 Identification No.)
of incorporation or organization)
650 FIFTH AVENUE, 14TH FLOOR 10019
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 July 1, 2000: 3,441,983 shares.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
PART I. Financial Information
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of July 1, 2000 (unaudited) and December 31,
1999........................................................................................ 3
Condensed Consolidated Statements of Operations for the Three and Six Month Periods Ended
July 1, 2000 and July 3, 1999 (unaudited)................................................... 4
Condensed Consolidated Statements of Cash Flows for the Three and Six Month Periods Ended
July 1, 2000 and July 3, 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........................................................................... 18
Item 1. Legal Proceedings........................................................................... 18
Item 2. Changes in Securities....................................................................... 18
Item 3. Defaults Upon Senior Securities............................................................. 18
Item 4. Submission of Matters to a Vote of Security Holders......................................... 18
Item 5. Other Information........................................................................... 18
Item 6. Exhibits and Reports on Form 8-K............................................................ 18
SIGNATURES................................................................................................. 19
EXHIBITS................................................................................................... 20
</TABLE>
2
<PAGE>
OUTSOURCING SERVICES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
FOR THE SIX MONTHS ENDED JULY 1, 2000 AND
THE YEAR ENDED DECEMBER 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JULY 1, DECEMBER 31, 1999
2000
----------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................................... $ 1,993 $ 2,530
Short term investments......................................................... 261 254
Accounts receivable, net....................................................... 37,608 36,206
Other receivables.............................................................. 3,794 2,372
Inventories, net (Note 3)...................................................... 32,691 30,848
Prepaid expenses and other current assets...................................... 1,612 1,085
Deferred income taxes, net..................................................... 3,555 3,555
--------- ---------
Total current assets......................................................... 81,514 76,850
PROPERTY AND EQUIPMENT, net.................................................... 41,899 33,342
GOODWILL, net.................................................................. 101,037 74,179
DEFERRED INCOME TAXES, non-current............................................. 3,051 3,051
DEFERRED FINANCING COSTS, net.................................................. 5,923 6,243
ENVIRONMENTAL INSURANCE RECEIVABLE............................................. 350 350
DUE FROM CCL................................................................... 3,376 3,376
OTHER ASSETS................................................................... 1,322 1,434
--------- ---------
Total assets................................................................. $ 238,472 $ 198,825
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable......................................................... $ 29,466 $ 29,513
Accrued expenses............................................................... 16,206 15,074
Deferred taxes................................................................. 274 274
Other current liabilities...................................................... 33 91
--------- ---------
Total current liabilities.................................................... 45,979 44,952
DEFERRED INCOME TAXES, non-current............................................. 3,426 3,406
ENVIRONMENTAL CONTINGENCIES AND OTHER LIABILITIES (Note 4)..................... 8,590 8,348
LONG TERM DEBT................................................................. 151,912 112,413
--------- ---------
Total liabilities............................................................ 209,907 169,119
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............................. 4,409 4,304
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 6,000,000 shares authorized; 3,441,983 shares
issued and outstanding as of July 1, 2000 and 3,441,983 as of December 31,
1999......................................................................... 3 3
Common stock warrants.......................................................... 663 663
Additional paid-in capital..................................................... 32,140 32,140
Notes receivable from stockholders............................................. (764) (764)
Accumulated deficit............................................................ (7,825) (7,083)
Accumulated other comprehensive income (loss).................................. (436) 68
--------- ---------
Total stockholders' equity................................................... 23,781 25,027
--------- ---------
Total Liabilities, Redeemable Preferred Stock and Stockholders' Equity....... $ 238,472 $ 198,825
========= =========
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED
JULY 1, 2000 AND JULY 3, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
<S> <C> <C> <C> <C>
JULY 1, JULY 3, JULY 1, JULY 3,
2000 1999 2000 1999
--------- --------- --------- ---------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUES................................................. $ 74,494 $ 68,974 $ 142,706 $ 132,697
COST OF GOODS SOLD........................................... 63,457 58,454 121,821 112,784
--------- --------- --------- ---------
GROSS PROFIT................................................. 11,037 10,520 20,885 19,913
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................. 6,500 5,855 12,894 11,869
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS............................ 4,537 4,665 7,991 8,044
INTEREST EXPENSE, net........................................ 4,306 3,284 8,033 6,672
OTHER INCOME, net............................................ -- (418) -- (418)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAX PROVISION.................... 231 1,799 (42) 1,790
PROVISION FOR INCOME TAXES................................... 48 787 576 1,033
--------- --------- --------- ---------
NET INCOME (LOSS)............................................ 183 1,012 (618) 757
ACCRETION OF PREFERRED STOCK................................. (53) (62) (105) (124)
PREFERRED STOCK DIVIDENDS.................................... (9) (9) (19) (19)
--------- --------- --------- ---------
NET INCOME (LOSS) ATTRIBUTABLE COMMON STOCKHOLDERS........... 121 941 (742) 614
========= ========= ========= =========
OTHER COMPREHENSIVE INCOME (LOSS) FOREIGN CURRENCY
TRANSLATION ADJUSTMENT..................................... (535) (17) (504) 659
--------- --------- --------- ---------
COMPREHENSIVE INCOME (LOSS).................................. (414) 924 (1,246) 1,273
========= ========= ========= =========
EARNINGS (LOSS) PER SHARE:
NET INCOME (LOSS) PER COMMON SHARE--Basic.................... $ 0.05 $ 0.29 $ (0.22) $ 0.18
--Diluted................... $ 0.05 $ 0.28 $ (0.22) $ 0.17
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
Basic........................................................ 3,441,983 3,447,737 3,441,983 3,447,737
Diluted...................................................... 3,580,483 3,586,237 3,580,483 3,586,237
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED JULY 1, 2000 AND JULY 3, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 1, JULY 3,
2000 1999
----------- -----------
<S> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................................................... $ (618) $ 757
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
Depreciation and amortization......................................................... 5,810 4,001
Amortization of deferred financing costs.............................................. 670 650
Provision for doubtful accounts....................................................... 247 150
Deferred income taxes................................................................. 20 --
Change in operating assets and liabilities, net of effect of Acupac Packaging and
Bradcan Corporation (1999) and Precision Packaging & Services, Inc. (2000)
Trade accounts receivable........................................................... 3,415 (11,816)
Other receivable.................................................................... (1,157) (1,970)
Inventories......................................................................... (395) (3,993)
Prepaid expenses and other current assets........................................... (492) (879)
Other assets........................................................................ 171 (279)
Accounts payable.................................................................... (2,292) 6,199
Accrued expenses and other liabilities.............................................. (125) 375
--------- ---------
Net cash provided by (used in) operating activities..................................... 5,254 (6,805)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................................................... (2,301) (1,510)
Short-term investments.................................................................. (7) --
Sale of property, plant and equipment................................................... 7 127
Acquistion Acupac Packaging and Bradcan Corporation, net of cash (1999) and Precision
Packaging & Services, Inc., net of cash (2000)........................................ (42,117) (10,450)
--------- ---------
Net cash used in investing activities................................................... (44,418) (11,833)
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTH PERIOD ENDED JULY 1, 2000 AND JULY 3, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 1, JULY 3,
2000 1999
----------- -----------
<S> <C> <C>
(UNAUDITED)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on revolving loans....................................................... 39,499 11,238
Dividends on Preferred Stock............................................................ (18) (19)
Increase in deferred financing costs.................................................... (350) --
Repurchase of Management Stock.......................................................... -- (124)
--------- ---------
Net cash provided by financing activities............................................... 39,131 11,095
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH................................................. (504) 542
--------- ---------
NET DECREASE IN CASH.................................................................... (537) (7,001)
CASH, beginning of period............................................................... 2,530 8,747
--------- ---------
CASH, end of period..................................................................... $ 1,993 $ 1,746
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the six month period:
Interest.............................................................................. $ 7,015 $ 6,221
Income taxes.......................................................................... $ 1,889 $ 748
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Accretion attributable to preferred stock............................................... $ 124 $ 124
========= =========
The Company acquired all the capital stock of Acupac Packaging (1999) and some of the
assets of the Bradcan Corporation (1999), and Precision (2000)
In conjunction with the acquisitions, liabilities were assumed as follows:
Fair value of assets acquired......................................................... $ 16,439 $ 5,310
Intangible assets acquired............................................................ 29,869 $ 8,506
Cash paid for capital stock........................................................... (35,639) (9,733)
Cash paid for assets.................................................................. (6,000) (717)
--------- ---------
Liabilities assumed................................................................... $ 4,669 $ 3,366
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIOD ENDED JULY 1, 2000 AND JULY 3, 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. The financial statements should be read in conjunction with the
financial statements and related notes to the Company's 1999 Annual Report on
Form 10-K, as filed with the SEC.
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 July 1, 2000 and December 31, 1999 the results of
its operations for the three and six month period ended July 1, 2000 and
July 3, 1999 and its cash flows for the six month periods ended July 1, 2000 and
July 3, 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". SFAS No. 133, as
amended by SFAS No. 137, and SFAS No. 138 requires adoption by the company no
later than January 1, 2001. The Company plans to adopt SFAS No. 133 at that
time. The Company is currently evaluating the impact of the adoption of SFAS
No. 133 on the financial statements. In December 1999, the SEC issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"), which provided its views on applying generally accepted accounting
principles to selected revenue recognition issues. The Company is required to
adopt SAB 101 no later than January 1, 2001. The Company is currently evaluating
the impact of the adoption of SAB 101 on the financial statements.
3. INVENTORIES
Inventories consisted of the following at July 1, 2000 and December 31,
1999:
<TABLE>
<CAPTION>
JULY 1,
2000 DECEMBER 31, 1999
----------- -----------------
<S> <C> <C>
(IN THOUSANDS)
Raw materials.......................................................... $ 24,663 $ 23,045
Work-in-process........................................................ 4,699 4,428
Finished goods......................................................... 6,686 6,344
--------- ---------
36,048 33,817
Less reserve for excess and obsolete inventories....................... (3,357) (2,969)
--------- ---------
$ 32,691 $ 30,848
========= =========
</TABLE>
7
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. CONTINGENCIES
ENVIRONMENTAL REGULATION AND COMPLIANCE
The Company's operations and properties are subject to extensive federal,
state, local and foreign environmental laws and regulations concerning among
other things, emissions to air, discharges to water, the remediation of
contaminated soil and groundwater, and the generation, handling, storage,
transportation, treatment and disposal of waste and other materials
(collectively, "Environmental Laws"). Violations of Environmental Laws can
result in civil or criminal penalties or in cease and desist or other orders
against the Company. In addition, the Company may be required to spend material
amounts to comply with Environmental Laws, and may be liable with respect to
contamination of sites currently or formerly owned or operated by the Company or
with respect to the off-site disposal of hazardous substances. Based upon the
Company's experience to date, as well as certain indemnification agreements
obtained in connection with the Kolmar Acquisition, the ASC acquisition and the
Piedmont acquisition, and certain insurance coverages, the Company believes that
the future cost of compliance with existing Environmental Laws and its liability
for identified environmental claims will not have a material adverse effect on
the Company's business, results of operations or financial condition. There can
be no assurance, however, that the Company's obligations in this regard will not
have such an effect or that the existing indemnities and insurance will be
sufficient to fund such liabilities. Furthermore, future events, such as new
information, or changes in Environmental Laws (or in their interpretation or
enforcement by courts or governmental agencies) may give rise to additional
costs or claims that could have a material adverse effect on the Company's
business, results of operations, financial condition or cash flows.
Certain environmental laws, such as the Federal Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended ("CERCLA") and
analogous state laws, impose liability for the investigation and remediation of
hazardous substances released into the environment. Courts have interpreted
CERCLA to impose strict, and in some circumstances, joint and several, liability
on all potentially responsible parties ("PRPs") at a site if the harm is
indivisible, which means that one PRP could be held liable for the entire cost
of cleanup at a site where multiple parties contributed to the contamination. As
a practical matter, however, the costs typically are allocated, according to
volumetric or other standards, among the PRPs. Under CERCLA and analogous state
laws, the Company may incur liability for contamination at properties presently
or formerly owned or operated by the Company or its subsidiaries or predecessors
(including contamination caused by the Company's predecessors or prior owners or
operators of such sites), or at properties where such entities sent waste for
off-site treatment or disposal.
In that regard, ASC's operations are located within the boundaries of the
Puente Valley Operable Unit ("OU") of the San Gabriel Valley Superfund Site.
Prior to the Company's purchase of ASC, the U.S. Environmental Protection Agency
("EPA") identified ASC as one of more than five hundred PRPs for the Puente
Valley OU. Subsequently, ASC and forty-three other PRPs entered into a consent
agreement to fund certain investigatory work, which work was completed in 1997.
To date, the EPA has not finally determined the remedial work that will be
required at the site; however, the EPA has issued estimates for the remedial
alternatives it is considering which range from approximately $28 million to
$51 million. In connection with the Company's purchase of ASC, the sellers (who
currently own the property on which ASC operates) agreed to indemnify the
Company with respect to the Puente Valley OU proceeding and certain other
environmental matters. Certain of the Company's leases with the sellers also
provide for off-sets to the Company's rental obligations in the event that the
Company incurs liability for such an
8
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. CONTINGENCIES (CONTINUED)
indemnified matter. Based on this indemnity, the lease off-set rights, recent
EPA cost estimates of the proposed cleanup alternatives and certain preliminary
estimates of ASC's share of liability, the Company believes, although there can
be no assurance, that ASC's liability at this site will not be material. In
addition, prior to the Company's merger with Aerosol Services Holding
Corporation ("ASHC"), the Los Angeles Regional Water Quality Control Board
("RWQCB") requested that ASC conduct certain soil and groundwater investigation,
this remediation began in the 2nd quarter of 2000. ASC has conducted the
requested investigations and the RWQCB has approved ASC's remediation plan.
Although there can be no assurance, the Company does not believe that the costs
of remediation will be material. This remediation is also the subject of the
above-referenced indemnity.
Also, in regard to CERCLA, Kolmar and a former affiliate, Wickhen Products
("Wickhen"), have been identified as the two principal PRPs at the Carroll &
Dubies Superfund site in Port Jervis, New York. At the Carroll & Dubies site,
the remediation work was completed during 1999 and the final post-remediation
facility inspection was completed in December 1999. As of July 1, 2000,
$6.7 million of clean-up costs were incurred and funded through insurance.
Post-remediation monitoring, expected to cost $350,000 has commenced in the year
2000 and will continue through year 2005. The entire project has been, and will
continue to be, fully indemnified by CCL.
Based on the advice of outside counsel, the Company also maintained an
accrual of $5,250,000 as of July 1, 2000 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 July 1, 2000 of $750,000
for liabilities related to off-site waste disposal locations.
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 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 against income
in the future.
Piedmont's owned facility in Gainesville, Georgia is listed on the State of
Georgia's Hazardous Site Inventory ("HSI") of environmentally impacted sites due
to the detection of chlorinated solvents in the groundwater beneath the
facility. The Company is currently performing voluntary groundwater remediation.
The former owners of Piedmont have provided a partial indemnity for remediation
costs incurred at the facility. Based on this indemnity and the Company's
current estimates of reasonably possible remediation costs, the Company believes
that its liability for this site will not have a material adverse effect on the
Company.
The Company also faces risks relating to federal and state environmental
regulation of VOCs. Recently enacted or future legislation requiring reductions
in the use of these materials could materially adversely affect the Company's
business if the industry does not develop material technology and product
9
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. CONTINGENCIES (CONTINUED)
formulations to meet such future standards. California and New York recently
have mandated reductions in volatile organic chemicals in aerosol products, and
it is possible that Georgia and other states may in the future pass similar
legislation or enact regulations. All of the Company's products meet the current
regulatory standards, and management believes, although there can be no
assurance, that material technology and product formulations will be developed
that meet the future standards.
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 proceedings and claims with certainty, management is of
the belief that any ultimate liabilities will not individually or in the
aggregate have an adverse effect on the Company's financial position or results
of operations.
5. BUSINESS ACQUISITION
On February 29, 2000, pursuant to a stock purchase agreement dated
February 29, 2000, the Company acquired all of the issued and outstanding stock
of Precision Packaging and Services, Inc., an Ohio Corporation ("Precision"),
and the related real estate from the Susan L. Purkrabek Small Business Trust, an
electing small business trust, the David G. Knust Small Business Trust, an
electing small business trust and K.P. Properties, an Ohio general partnership
controlled by Ms. Purkrabek and Mr. Knust (the "Sellers") for approximately
$42.1 million. Precision is a contract manufacturer of consumer products (i.e.,
high speed liquid filling, cartoning, shrink wrapping, packaging) for some of
the largest U.S. consumer products companies. The Company plans for Precision to
continue in this line of business. The Company drew against its existing
revolving credit facility to pay Sellers.
The acquisition has been accounted for as a purchase, and accordingly, the
purchase price was allocated to the net tangible and intangible assets acquired
based on estimated fair values at February 29, 2000. The excess purchase price
over the net assets and liabilities acquired was allocated to goodwill which is
being amortized over 15 years. The results of operations of Precision have been
included in the condensed consolidated financial statements since the
acquisition date.
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
July 1, 2000 and the condensed combined statements of operations and cash flows
for the six month period ended July 1, 2000 of the Guarantors, representing
Kolmar, ASC, Piedmont, Acupac, and Precision 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
six month period ended July 1, 2000.
10
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONDENSED COMBINED BALANCE SHEET AT JULY 1, 2000
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED CONSOLIDATED
GUARANTORS NONGUARANTORS OSG ELIMINATIONS TOTAL
----------- -------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents, short-term
investments............................... $ 1,828 $ 421 $ 5 $ -- $ 2,254
Accounts receivable, net.................... 33,824 3,784 -- -- 37,608
Other receivables........................... 821 4 2,969 -- 3,794
Inventories................................. 28,357 4,334 -- -- 32,691
Prepaid expenses and other current assets... 4,766 353 48 -- 5,167
--------- ------------ ---------- ---------- ----------
Total current assets........................ 69,596 8,896 3,022 -- 81,514
Property and equipment, net................. 37,283 4,476 140 -- 41,899
Goodwill, net............................... 95,094 5,943 -- -- 101,037
Intercompany receivable (payable)........... 36,478 (4,430) (32,048) -- --
Investment in subsidiaries.................. -- -- 143,167 (143,167) --
Other long-term assets...................... 7,861 38 6,123 -- 14,022
--------- ------------ ---------- ---------- ----------
Total Assets................................ $ 246,312 $ 14,923 $ 120,404 $ (143,167) $ 238,472
========= ============ ========== ========== ==========
LIABILITIES:
Current Liabilities:
Accounts payable............................ $ 26,551 $ 2,915 $ -- $ -- $ 29,466
Other current liabilities................... 10,824 1,635 4,054 -- 16,513
--------- ------------ ---------- ---------- ----------
Total current liabilities................... 37,375 4,550 4,054 -- 45,979
Long-term debt, less current portion........ 46,912 -- 105,000 -- 151,912
Other liabilities........................... 12,016 -- -- -- 12,016
Intercompany loan........................... 13,610 9,705 (23,315) -- --
Redeemable preferred stock.................. -- -- 4,784 -- 4,784
Stockholders' equity........................ 136,399 668 29,881 (143,167) 23,781
--------- ------------ ---------- ---------- ----------
Total Liabilities, Redeemable
Preferred Stock and Stockholders' Equity.... $ 246,312 $ 14,923 $ 120,404 $ (143,167) $ 238,472
========= ============ ========== ========== ==========
</TABLE>
11
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTH PERIOD ENDED
JULY 1, 2000
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED CONSOLIDATED
GUARANTORS NONGUARANTORS OSG ELIMINATIONS TOTAL
----------- -------------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net revenues.................................. $ 131,327 $ 11,714 $ -- $ (335) $ 142,706
Cost of goods sold............................ 111,988 10,168 -- (335) 121,821
--------- ---------- --------- --------- ----------
Gross profit.................................. 19,339 1,546 -- -- 20,885
Selling, general and administrative
expenses.................................... 11,246 1,532 116 -- 12,894
--------- ---------- --------- --------- ----------
Income (loss) from operations................. 8,093 14 (116) -- 7,991
Interest expense, net......................... 2,621 386 5,026 -- 8,033
Other Expense (income) net.................... 3,801 -- (3,801) -- --
--------- ---------- --------- --------- ----------
Income (loss) before income tax provision..... 1,671 (372) (1,341) -- (42)
Provision (benefit) for income taxes.......... 787 104 (315) -- 576
--------- ---------- --------- --------- ----------
Net Income (loss)............................. $ 884 $ (476) $ (1,026) $ -- $ (618)
========= ========== ========= ========= ==========
</TABLE>
12
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONDENSED COMBINED STATEMENT OF CASH FLOWS FOR THE SIX MONTH PERIOD ENDED JULY
1, 2000
(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).................................... $ 884 $ (476) $ (1,026) $ -- $ (618)
Total adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities......................................... 3,963 1,352 (41,082) 41,639 5,872
--------- ---------- --------- ---------- ----------
Net cash provided by (used in) operating
activities......................................... 4,847 876 (42,108) 41,639 5,254
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures................................. (1,981) (320) -- -- (2,301)
Short-term investments............................... (7) -- -- -- (7)
Acquisition of Precision Packaging, net of cash...... (42,117) -- -- -- (42,117)
Sales of property, plant or equipment, net........... 7 -- -- -- 7
--------- ---------- --------- ---------- ----------
Net cash used in investing activities................ (44,098) (320) -- -- (44,418)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowing on revolving loans..................... 39,499 -- -- -- 39,499
Dividends on Preferred Stock......................... -- -- (18) -- (18)
Increase in deferred finance cost.................... -- -- (350) -- (350)
Repayment (borrowing) of debt due to affiliate....... (147) (34) 41,820 (41,639) --
Payment of dividends................................. (626) -- 626 -- --
--------- ---------- --------- ---------- ----------
Net cash provided by (used in) financing
activities......................................... 38,726 (34) 42,078 (41,639) 39,131
Effect of exchange rate changes on cash.............. -- (504) -- -- (504)
--------- ---------- --------- ---------- ----------
Net increase (decrease) in cash...................... (525) 18 (30) -- (537)
Cash, beginning of period............................ 2,092 403 35 -- 2,530
--------- ---------- --------- ---------- ----------
Cash, end of period................................ $ 1,567 $ 421 $ 5 $ -- $ 1,993
========= ========== ========= ========== ==========
</TABLE>
13
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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, household products
and aerosol products such as high-end hair spray and shaving creams and gels
industry. 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 six and three month periods ended
July 1, 2000 are as follows:
<TABLE>
<CAPTION>
SIX MONTH PERIOD
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNITED
STATES MEXICO CANADA OTHER TOTAL
---------- --------- --------- --------- ----------
Net revenues................................................. $ 130,992 $ 4,410 $ 7,304 $ -- $ 142,706
Income from operations....................................... 7,977 (167) 209 (28) 7,991
Identifiable assets.......................................... 219,122 5,101 13,410 839 238,472
Depreciation and amortization................................ 5,421 125 235 29 5,810
</TABLE>
<TABLE>
<CAPTION>
THREE MONTH PERIOD
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNITED
STATES MEXICO CANADA OTHER TOTAL
---------- --------- --------- --------- ----------
Net Revenues................................................. $ 68,840 $ 2,056 $ 3,598 $ -- $ 74,494
Income from Operations....................................... 4,598 (244) 187 (4) 4,537
Identifiable assets.......................................... 219,122 5,101 13,410 839 238,472
Depreciation and amortization................................ 2,970 56 116 14 3,156
</TABLE>
Net revenues, income from operations, identifiable assets and depreciation
and amortization by geographic region for the six month period ended July 3,
1999, are as follows:
<TABLE>
<CAPTION>
SIX MONTH PERIOD
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNITED
STATES MEXICO CANADA OTHER TOTAL
---------- --------- --------- --------- ----------
Net revenues................................................. $ 122,525 $ 4,919 $ 5,253 $ -- $ 132,697
Income from operations....................................... 7,435 272 281 56 8,044
Identifiable assets.......................................... 204,133 4,307 12,473 16 220,929
Depreciation and amortization................................ 3,701 122 159 8 3,990
</TABLE>
<TABLE>
<CAPTION>
THREE MONTH PERIOD
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNITED
STATES MEXICO CANADA OTHER TOTAL
---------- --------- --------- --------- ----------
Net revenues................................................. $ 63,429 $ 2,251 $ 3,294 $ -- $ 68,974
Income from operations....................................... 4,442 19 96 108 4,665
Identifiable assets.......................................... 204,133 4,307 12,473 16 220,929
Depreciation and amortization................................ 1,821 63 140 4 2,028
</TABLE>
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS.
GENERAL
The Company 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 six and three month periods ended July 1, 2000 compared to the six
and three month periods ended July 3, 1999.
NET REVENUE. Revenues of $142.7 and $74.5 million for the six month and
three month periods ended July 1, 2000 increased by approximately $10.0 million
(7.5%) and $5.5 million (8.0%), respectively, from the prior 1999 periods. The
increases for the six and three month periods are primarily attributable to the
acquisitions of Acupac and Precision which contributed $8.2 million and
$12.8 million respectively for a net revenue increase of $21.0 million for the
six months ended July 1, 2000, offset by a decrease in sales of $11.0 million
which was higher in the first six months of 1999 due to a new line of color
cosmetics for a large domestic customer.
COST OF GOODS SOLD. Cost of goods sold of $121.8 million and $63.5 million
for the six and three month periods ended July 1, 2000, increased by
approximately $9.0 million (8.0%) and $5.0 million (8.6%), respectively, from
the prior 1999 periods. Total cost of goods sold, as a percentage of sales,
increased slightly to 85.4% and 85.2% for the six and three month periods from
85.0% and 85.0% from the prior 1999 periods. The increase was attributable to
the acquisition of Acupac and Precision. They contributed $7.6 million and
$10.7 million respectively, to the cost of goods sold for the six months ended
July 1, 2000, offset by a decrease in cost of goods sold of $9.3 million.
SG&A EXPENSES. Selling, general and administrative expenses ("SG&A") of
$12.9 million and $6.5 million for the six and three month periods ended
July 1, 2000, increased by approximately $1.0 million (8.6%) and increased by
$0.6 million (11.0%), respectively, from the prior 1999 periods. The increase
was attributable to the acquisition of Acupac and Precision their total SG&A was
$1.4 million and $1.0 million, respectively, for the six months ended July 1,
2000. As a percentage of net revenues, SG&A increased slightly to 9.0% and 8.7%,
respectively, for the six and three month periods ended July 1, 2000.
INTEREST EXPENSE. Interest expense of $8.0 million and $4.3 million for the
six and three month periods ended July 1, 2000, increased by approximately
$1.3 million (20.4%) and $1.0 million (31.1%), respectively, from the prior 1999
periods. Total indebtedness increased $46.9 million from $105.0 million at
July 3, 1999 to $151.9 million at July 1, 2000. The increase in debt and related
interest expense was primarily attributable to the acquisition of Precision on
February 29, 2000.
LIQUIDITY AND CAPITAL RESOURCES
As of July 1, 2000, OSG had cash and cash equivalents of $2.0 million,
working capital of $35.5 million and long-term debt of $151.9 million. The
primary sources of cash were from financing activities due to the
15
<PAGE>
acquisition of Precision on February 29, 2000. Principal uses of cash were for
capital expenditures, acquisition, and interest payments. Cash provided by (used
in) operations was $5.3 million and ($6.8) million for the six month period
ended July 1, 2000 and July 3, 1999, respectively.
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 June 30, 2001.
The Company's capital expenditures are expected to increase slightly from
historical levels. The Company's capital expenditures will be primarily for
replacements of existing assets, new customer requirements, and to upgrade
various manufacturing equipment and facilities in order to reduce manufacturing
costs.
CERTAIN TRENDS AND UNCERTAINTIES
Historically, the Company has grown its business through acquisitions and
investments in its operations. The Company intends to continue during 2000 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
We have not experienced any business interruptions or supplier delays from
year 2000 problems to date and have not discovered any year 2000 problems in
internal computer systems material to our operations. We intend to continue to
monitor our internal system for year 2000 problems. There can be no assurance,
however, that we or our suppliers may not face future problems as a result of
year 2000 issues.
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-
16
<PAGE>
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; 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 indebtedness of the Company; the availability and terms of capital
to fund the expansion of the Company's business; and other factors referenced in
this Form 10-Q and the Company's Form 10-K, copies of which may be obtained from
the Company without cost.
17
<PAGE>
PART II
OTHER INFORMATION
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
(a) Exhibit Index
<TABLE>
<CAPTION>
ITEM
NUMBER EXHIBIT PAGE
----------- --------------------------------------------------------------------------------- ---------------------
<C> <S> <C>
11. Statement of computation of basic and diluted net income per share 20
27. Financial data schedule Filed electronically
</TABLE>
(b) Reports on Form 8-K*
* Previously filed.
18
<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.
<TABLE>
<S> <C>
OUTSOURCING SERVICES GROUP, INC.
Dated: August 15, 2000 /s/ JOSEPH M. HEALY
----------------------------------------------
Joseph M. Healy
Chief Executive Officer, President
and Director (Principal Executive Officer)
Dated: August 15, 2000 /s/ PERRY MORGAN
----------------------------------------------
Perry Morgan
Chief Financial Officer, Vice President
and Secretary
(Principal Financial and Accounting Officer)
</TABLE>
19
