<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 APRIL 1, 2000
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
NEW YORK, NY 10019
(Address of principal executive offices) (Zip Code)
</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 April 1, 2000: 3,441,983 shares.
- --------------------------------------------------------------------------------
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<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 April 1, 2000
(unaudited) and December 31, 1999........................... 3
Condensed Consolidated Statements of Operations for the
Three Months Ended April 1, 2000 and April 3, 1999
(unaudited)................................................. 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended April 1, 2000 and April 3, 1999
(unaudited)................................................. 5
Notes to Condensed Consolidated Financial Statements
(unaudited)................................................. 7
ITEM 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations................................... 14
PART II. Other Information........................................... 17
Item 1. Legal Proceedings........................................... 17
Item 2. Changes in Securities....................................... 17
Item 3. Defaults Upon Senior Securities............................. 17
Item 4. Submission of Matters to a Vote of Security Holders......... 17
Item 5. Other Information........................................... 17
Item 6. Exhibits and Reports on Form 8-K............................ 17
SIGNATURES............................................................ 18
EXHIBITS.............................................................. 19
</TABLE>
2
<PAGE>
OUTSOURCING SERVICES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
APRIL 1, DECEMBER 31,
2000 1999
----------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,112 $ 2,530
Short-term investments.................................... 254 254
Accounts receivable, net.................................. 40,982 36,206
Other receivables......................................... 3,107 2,372
Inventories, net.......................................... 33,668 30,848
Prepaid expenses and other current assets................. 1,634 1,085
Deferred income taxes, current............................ 3,555 3,555
-------- --------
Total current assets.................................... 86,312 76,850
PROPERTY AND EQUIPMENT, net............................... 42,005 33,342
GOODWILL, net............................................. 103,138 74,179
DEFERRED INCOME TAXES, non-current........................ 3,051 3,051
DEFERRED FINANCING COSTS, net............................. 6,272 6,243
ENVIRONMENTAL INSURANCE RECEIVABLE........................ 350 350
DUE FROM CCL.............................................. 3,376 3,376
OTHER ASSETS.............................................. 1,273 1,434
-------- --------
Total assets............................................ $245,777 $198,825
======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable.................................... $ 29,588 $ 29,513
Accrued expenses.......................................... 14,544 15,074
Deferred income taxes, current............................ 274 274
Other current liabilities................................. 716 91
-------- --------
Total current liabilities............................... 45,122 44,952
DEFERRED INCOME TAXES, non-current........................ 3,406 3,406
ENVIRONMENTAL CONTINGENCIES AND OTHER LIABILITIES......... 8,442 8,348
LONG TERM DEBT............................................ 159,881 112,413
-------- --------
Total liabilities....................................... 216,851 169,119
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......... 4,356 4,304
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 6,000,000 shares
authorized; 3,441,983 shares issued and outstanding..... 3 3
Common stock warrants..................................... 663 663
Additional paid-in capital................................ 32,140 32,140
Notes receivable from stockholders........................ (764) (764)
Accumulated deficit....................................... (7,946) (7,083)
Accumulated other comprehensive income.................... 99 68
-------- --------
Total stockholders' equity.............................. 24,195 25,027
-------- --------
Total liabilities, redeemable preferred stock and
stockholder's equity................................ $245,777 $198,825
======== ========
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 1, 2000 AND APRIL 3, 1999 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
APRIL 1, 2000 APRIL 3, 1999
-------------- --------------
<S> <C> <C>
NET REVENUES................................................ $ 68,212 $ 63,723
COST OF GOODS SOLD.......................................... 58,364 54,330
---------- ----------
GROSS PROFIT................................................ 9,848 9,393
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 6,394 6,014
---------- ----------
INCOME FROM OPERATIONS...................................... 3,454 3,379
INTEREST EXPENSE, net....................................... 3,727 3,388
---------- ----------
LOSS BEFORE PROVISION FOR INCOME TAXES...................... (273) (9)
PROVISION FOR INCOME TAXES.................................. 528 246
---------- ----------
NET LOSS.................................................... (801) (255)
ACCRETION AND DIVIDENDS ON PREFERRED STOCK.................. (62) (62)
---------- ----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS................ (863) (317)
========== ==========
NET LOSS.................................................... $ (801) $ (255)
OTHER COMPREHENSIVE (LOSS) INCOME:
FOREIGN CURRENCY TRANSLATION ADJUSTMENT..................... 31 600
---------- ----------
COMPREHENSIVE (LOSS) INCOME................................. $ (770) $ 345
========== ==========
LOSS PER SHARE, BASIC AND DILUTED........................... $ (0.23) $ (0.07)
========== ==========
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS................ $ (0.25) $ (0.09)
WEIGHTED AVERAGE COMMON SHARES, BASIC AND DILUTED........... $3,441,983 $3,453,366
========== ==========
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 1, 2000 AND APRIL 3, 1999 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
APRIL 1, 2000 APRIL 3, 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (801) $ (255)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization........................... 2,654 1,962
Amortization of deferred financing costs................ 321 325
Provision for doubtful accounts......................... 184 107
Change in operating assets and liabilities, net of effect
of Acquisition of Precision Packaging (2000)
Trade accounts receivables.............................. 468 (2,334)
Other receivables....................................... (1,948) 862
Inventories............................................. (1,313) (1,831)
Prepaid expenses and other current assets............... (503) (1,341)
Other assets............................................ 1,189 316
Accounts payable........................................ (2,093) 6,962
Accrued expenses and other liabilities.................. (1,391) (4,242)
-------- -------
Net cash (used in) provided by operating activities... (3,233) 531
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (811) (503)
Sale of property, plant and equipment....................... 5 71
Acquisition of Precision Packaging, net of cash acquired.... (42,429) --
-------- -------
Net cash used in investing activities................. (43,235) (432)
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS ENDED APRIL 1, 2000 AND APRIL 3, 1999 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
APRIL 1, 2000 APRIL 3, 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVTIES:
Net borrowing on revolving loans............................ 47,468 --
Dividends on preferred stock................................ (9) (9)
Increase in deferred finance cost........................... (350) --
Repurchase of management stock.............................. -- (124)
-------- -------
Net cash provided by (used in) financing activities... 47,109 (133)
-------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (59) 426
-------- -------
NET INCREASE IN CASH........................................ 582 392
CASH, beginning of period................................... 2,530 8,747
-------- -------
CASH, end of period......................................... $ 3,112 $ 9,139
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the quarter for:
Interest.................................................. $ 5,709 $ 6,103
======== =======
Income taxes.............................................. $ 140 $ 118
======== =======
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Accretion attributable to preferred stock................... $ 53 $ 53
======== =======
The Company acquired all the capital stock of Precision
Packaging and Services, Inc. (February 29, 2000)
In conjunction with the acquisition, liabilities were
assumed as follows:
Fair value of assets acquired........................... $ 16,766 $ --
Intangible assets acquired.............................. 30,139 --
Cash paid for capital stock............................. (36,237) --
Cash paid for assets.................................... (6,000) --
-------- -------
Liabilities assumed..................................... 4,668 --
======== =======
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED APRIL 1, 2000 AND APRIL 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.
In the opinion of management, the condensed consolidated financial
statements included herein reflect adjustments consisting only of normal
recurring adjustments necessary to present fairly the consolidated financial
position of the Company as of April 1, 2000, and April 3, 1999, the results of
its operations and cash flows for the three month periods ended April 1, 2000
and April 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 June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivatives Instruments and Hedging Activities". SFAS
No. 133, as amended by SFAS No. 137, 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 still evaluating the effects of adopting SFAS No. 133
3. INVENTORIES
Inventories consisted of the following at April 1, 2000 and December 31,
1999:
<TABLE>
<CAPTION>
APRIL 1, DECEMBER 31,
2000 1999
--------- -------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials.......................................... $24,830 $23,045
Work-in-process........................................ 5,140 4,428
Finished goods......................................... 7,064 6,344
------- -------
37,034 33,817
Less reserve for excess and obsolete inventories....... (3,366) (2,969)
------- -------
$33,668 $30,848
======= =======
</TABLE>
4. CONTINGENCIES
ENVIRONMENTAL REGULATION AND COMPLIANCE
The Company's operations and properties are subject to extensive federal,
state, local and foreign environment 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
7
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED APRIL 1, 2000 AND APRIL 3, 1999
(UNAUDITED)
4. CONTINGENCIES (CONTINUED)
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 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
8
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED APRIL 1, 2000 AND APRIL 3, 1999
(UNAUDITED)
4. CONTINGENCIES (CONTINUED)
Los Angeles Regional Water Quality Control Board ("RWQCB") requested that ASC
conduct certain soil and groundwater investigation and remediation on its
property. ASC has conducted 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. To date $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 April 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 April 1, 2000 of $750,000
for liability 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 to 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
formulations to meet such future standards. California and New York recently
have mandated reductions in VOCs in aerosol products, and it is possible that
Georgia and other states may in the future pass similar legislation or enact
regulations. All of the Company's products meet the current regulatory
standards, and
9
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED APRIL 1, 2000 AND APRIL 3, 1999
(UNAUDITED)
4. CONTINGENCIES (CONTINUED)
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 a
material 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
$42.4 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. 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 April
1, 2000 and the condensed combined statements of operations and cash flows for
the three month period ended April 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
and Kolmar Laboratories, Inc. (London). The financial information is intended to
provide information for the guarantor and non-guarantor operations of the
Company, based on amounts derived from the financial statements of the Company
and of the Kolmar Group, for the three month period ended April 1, 2000.
10
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED APRIL 1, 2000 AND APRIL 3, 1999
(UNAUDITED)
6. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONDENSED COMBINED BALANCE SHEET AT APRIL 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 short term investments..... $ 3,007 $ 358 $ 1 $ -- $ 3,366
Accounts receivable, net............ 36,380 4,602 -- -- 40,982
Other receivables................... 2,584 4 519 -- 3,107
Inventories......................... 29,894 3,774 -- -- 33,668
Prepaid expenses and other current
assets............................ 4,769 420 -- -- 5,189
-------- ------- -------- --------- --------
Total current assets................ 76,634 9,158 520 -- 86,312
Property and equipment, net......... 37,369 4,596 40 -- 42,005
Goodwill, net....................... 96,867 6,271 -- -- 103,138
Intercompany receivable (payable)... 37,017 (5,121) (31,896) -- --
Investment in subsidiaries.......... -- -- 143,167 (143,167) --
Other long-term assets.............. 8,217 37 6,068 -- 14,322
-------- ------- -------- --------- --------
Total Assets........................ $256,104 $14,941 $117,899 $(143,167) $245,777
======== ======= ======== ========= ========
LIABILITIES:
Current Liabilities:
Accounts payable.................... $ 27,854 $ 1,734 $ -- $ -- $ 29,588
Other current liabilities........... 12,550 1,797 1,187 -- 15,534
-------- ------- -------- --------- --------
Total current liabilities........... 40,404 3,531 1,187 -- 45,122
Long-term debt, less current
portion........................... 54,881 -- 105,000 -- 159,881
Other liabilities................... 11,848 -- -- -- 11,848
Intercompany loan................... 13,338 9,977 (23,315) -- --
Redeemable preferred stock.......... -- -- 4,731 -- 4,731
Stockholders' equity................ 135,633 1,433 30,296 (143,167) 24,195
-------- ------- -------- --------- --------
Total Liabilities, Redeemable
Preferred Stock and Stockholders'
Equity............................ $256,104 $14,941 $117,899 $(143,167) $245,777
======== ======= ======== ========= ========
</TABLE>
11
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED APRIL 1, 2000 AND APRIL 3, 1999
(UNAUDITED)
6. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 1,
2000
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED CONSOLIDATED
GUARANTORS NONGUARANTORS OSG ELIMINATIONS TOTAL
---------- ------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net revenues.................................. $62,184 $6,060 $ -- $ 32 $68,212
Cost of goods sold............................ 53,101 5,295 -- (32) 58,364
------- ------ ------- ---- -------
Gross profit.................................. 9,083 765 -- -- 9,848
Selling, general and administrative expense... 5,667 666 61 -- 6,394
------- ------ ------- ---- -------
Income (loss) from operations................. 3,416 99 (61) -- 3,454
Interest expense, net......................... 1,050 166 2,511 -- 3,727
Other expense (income) net.................... 1,889 -- (1,889) -- --
------- ------ ------- ---- -------
Income (loss) before provision for income
taxes....................................... 477 (67) (683) -- (273)
Provision (benefit) for income taxes.......... 544 (16) -- -- 528
------- ------ ------- ---- -------
Net loss...................................... $ (67) $ (51) $ (683) $ -- $ (801)
======= ====== ======= ==== =======
</TABLE>
CONDENSED COMBINED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED APRIL 1,
2000 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NON- CONSOLIDATED
GUARANTORS GUARANTORS OSG ELIMINATIONS TOTAL
---------- ---------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................ $ (67) $ (51) $ (683) $ -- $ (801)
Total adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities.................................... 132 112 (44,315) 41,639 (2,432)
-------- ----- -------- -------- --------
Net cash provided by (used in) operating
activities.................................... 65 61 (44,998) 41,639 (3,233)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............................ (658) (153) -- -- (811)
Sales of property, plant or equipment, net...... 5 -- -- -- 5
Acquisition of Precision Packaging, net of cash
required...................................... (42,429) -- -- -- (42,429)
-------- ----- -------- -------- --------
Net cash used in investing activities........... (43,082) (153) -- -- (43,235)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayment) borrowing on revolving loan..... 47,468 -- -- -- 47,468
Dividends on preferred stock.................... (9) -- -- -- (9)
Increase in deferred finance cost............... -- -- (350) -- (350)
Payment of dividends............................ (626) -- 626 -- --
Repayment of debt due to affiliated............. (3,064) 16 44,687 (41,639) --
-------- ----- -------- -------- --------
Net (provided by) used in financing
activities.................................... 43,769 16 44,963 (41,639) 47,109
Effect of exchange rate changes on cash......... -- (59) -- -- (59)
-------- ----- -------- -------- --------
Net increase (decrease) in cash................. 752 (135) (35) -- 582
Cash, beginning of period....................... 2,092 403 35 -- 2,530
-------- ----- -------- -------- --------
Cash, end of period............................. $ 2,844 $ 268 $ -- $ -- $ 3,112
======== ===== ======== ======== ========
</TABLE>
12
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED APRIL 1, 2000 AND APRIL 3, 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, colored cosmetics, 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 three months ended April 1, 2000,
are as follows:
<TABLE>
<CAPTION>
UNITED
STATES MEXICO CANADA OTHER TOTAL
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenues............................. $ 62,152 $2,354 $ 3,706 $ -- $ 68,212
Income from operations................... 3,379 77 22 (24) 3,454
Identifiable assets...................... 225,715 5,834 13,379 849 245,777
Depreciation and amortization............ 2,451 69 119 15 2,654
</TABLE>
Net revenues, income from operations, identifiable assets and depreciation
and amortization by geographic region for the three months ended April 3, 1999,
are as follows:
<TABLE>
<CAPTION>
UNITED
STATES MEXICO CANADA OTHER TOTAL
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenues............................. $ 59,096 $2,668 $ 1,959 $ -- $ 63,723
Income from operations................... 2,993 253 185 (52) 3,379
Identifiable assets...................... 184,986 4,742 10,584 810 201,122
Depreciation and amortization............ 1,880 59 19 4 1,962
</TABLE>
13
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
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 three months ended April 1, 2000 compared to the three months ended
April 3, 1999.
NET REVENUE. Net revenues increased by approximately $4.5 million, or 7.1%
to $68.2 million for the three month period ended April 1, 2000 from $63.7
million for the three month period ended April 3, 1999. The increase was
primarily attributable to the acquisitions of Acupac Packaging and Precision
Packaging and Services, Inc., which contributed $4.9 million and $3.4 million,
respectively, for a net revenue increase of $8.3 million for the three months
ended April 1, 2000, offset by a decrease in sales of $3.8 million which was
higher in the 1st Quarter of 1999 due to the launch of a new line of color
cosmetics for a large domestic customer.
COST OF GOODS SOLD. Cost of goods sold increased by approximately $4.0
million, or 7.6% to $58.4 million for the three month period ended April 1, 2000
from $54.3 million for the three month period ended April 3, 1999. Total cost of
goods sold, as a percentage of sales, increased slightly to 85.6% for the three
month period ended April 1, 2000 from 85.3% for the three month period ended
April 3, 1999. The increase was attributable to the acquisition of Acupac
Packaging and Precision they contributed $4.0 million and $2.7 million,
respectively, to the cost of goods sold from the three months ended April 1,
2000, offset by a decrease in cost of goods sold of $2.7 million which was
higher in the 1st Quarter of 1999 due to the launch of a new line of color
cosmetics for a large domestic customer.
SG&A EXPENSES. Selling, general and administrative expenses ("SG&A")
increased approximately by $0.4 million or 6.3% to $6.4 million for the three
month period ended April 1, 2000 from $6.0 million for the three month period
ended April 3, 1999. The increase was attributable to the acquisition of Acupac
and Precision the total SG&A was $0.5 million and $0.3 million respectively, for
the three months ended April 1, 2000. As a percentage of net revenues, SG&A
remains the same at 9.4% for the three months period ended April 1, 2000 and
April 3, 1999.
INTEREST EXPENSE. Interest expense increased $0.3 million, or 10.0% to $3.7
million for the three month period ended April 1, 2000 from $3.4 million for the
three month period ended April 3, 1999. Total indebtedness increased $47.5
million from $112.4 million at April 3, 1999 to $159.9 million at April 1, 2000.
The increase in debt and related interest expense was primarily attributable to
the acquisition of Precision Packaging and Services, Inc. on February 29, 2000.
14
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
LIQUIDITY AND CAPITAL RESOURCES
As of April 1, 2000, OSG had cash and cash equivalents of $3.1 million,
working capital of $41.2 million and long-term debt of $159.9 million. The
primary sources of cash were from financing activities due to the acquisition of
Precision on February 29, 2000. Principal uses of cash were for acquisitions,
interest payments and capital expenditures. Cash (used in) provided by
operations was ($3.2) million and $0.5 million for the three month period ended
April 1, 2000 and April 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 2000.
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.
15
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
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; 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.
16
<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 19
27. Financial data schedule Filed electronically
</TABLE>
(B) REPORTS ON FORM 8-K*
On February 29, 2000 the Company filed a Form 8-K reporting the following
transaction under Item 2:
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, and 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 $42.4 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.
- ------------------------
* Previously filed.
17
<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> <C>
OUTSOURCING SERVICES GROUP, INC.
Dated: May 12, 2000 By: /s/ CHRISTOPHER DENNEY
-----------------------------------------
Christopher Denney
CHIEF EXECUTIVE OFFICER, PRESIDENT
AND DIRECTOR (PRINCIPAL EXECUTIVE OFFICER)
Dated: May 12, 2000 By: /s/ PERRY MORGAN
-----------------------------------------
Perry Morgan
CHIEF FINANCIAL OFFICER VICE PRESIDENT AND
SECRETARY (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
</TABLE>
18
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
STATEMENT OF COMPUTATION OF BASIC AND DILUTED NET LOSS PER SHARE
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
EXHIBIT 11.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
APRIL 1, 2000 APRIL 3, 1999
-------------- --------------
<S> <C> <C>
Basic loss per share:
Net loss attributable to common stockholders.............. $ (863) $ (317)
========= =========
Weighted average number of outstanding common shares........ 3,441,983 3,453,366
========= =========
Basic loss per share........................................ $ (0.25) $ (0.09)
========= =========
Diluted loss per share:
Net loss attributable to common stockholders.............. $ (863) $ (317)
========= =========
Weighted average number of outstanding common shares
assuming full dilution.................................... 3,441,983 3,453,366
========= =========
Diluted loss per share...................................... $ (0.25) $ (0.09)
========= =========
</TABLE>
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> APR-01-2000
<CASH> 3,366
<SECURITIES> 0
<RECEIVABLES> 42,193
<ALLOWANCES> (1,211)
<INVENTORY> 33,668
<CURRENT-ASSETS> 86,312
<PP&E> 50,875
<DEPRECIATION> (8,870)
<TOTAL-ASSETS> 245,777
<CURRENT-LIABILITIES> 45,122
<BONDS> 0
0
4,731
<COMMON> 32,143
<OTHER-SE> (7,948)
<TOTAL-LIABILITY-AND-EQUITY> 245,777
<SALES> 68,212
<TOTAL-REVENUES> 68,212
<CGS> 58,364
<TOTAL-COSTS> 6,394
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,727
<INCOME-PRETAX> (273)
<INCOME-TAX> (528)
<INCOME-CONTINUING> 3,454
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (801)
<EPS-BASIC> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
