<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 (IRS Employer
of incorporation or organization) Identification No.)
ONE MAYNARD DRIVE, SUITE 100 07656
PARK RIDGE, NJ (Zip Code)
(Address of principal executive
offices)
</TABLE>
Registrant's telephone number, including area code: (201) 307-6606
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 September 30, 2000: 3,440,983 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 September 30,
2000 (unaudited) and December 31, 1999...................... 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Period Ended September 30, 2000 and
October 2, 1999 (unaudited)................................. 4
Condensed Consolidated Statements of Cash Flows for the
Three and Nine Months Period Ended September 30, 2000 and
October 2, 1999 (unaudited)................................. 5
Notes to Condensed Consolidated Financial Statements
(unaudited)................................................. 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 16
PART II. Other Information........................................... 19
Item 1. Legal Proceedings........................................... 19
Item 2. Changes in Securities....................................... 19
Item 3. Defaults Upon Senior Securities............................. 19
Item 4. Submission of Matters to a Vote of Security Holders......... 19
Item 5. Other Information........................................... 19
Item 6. Exhibits and Reports on Form 8-K............................ 19
SIGNATURES.......................................................................... 20
EXHIBITS............................................................................ 21
</TABLE>
2
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
-------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,523 $ 2,530
Short-term investments.................................... 264 254
Accounts receivable, net.................................. 40,352 36,206
Other receivables......................................... 2,699 2,372
Inventories, net.......................................... 34,395 30,848
Prepaid expenses and other current assets................. 2,051 1,085
Deferred income taxes, current............................ 3,555 3,555
-------- --------
Total current assets.................................... 86,839 76,850
PROPERTY, PLANT AND EQUIPMENT, net........................ 42,772 33,342
GOODWILL, net............................................. 102,437 74,179
DEFERRED INCOME TAXES, non-current........................ 3,051 3,051
DEFERRED FINANCING COSTS, net............................. 5,596 6,243
ENVIRONMENTAL INSURANCE RECEIVABLE........................ 350 350
DUE FROM CCL.............................................. 3,376 3,376
OTHER ASSETS.............................................. 1,223 1,434
-------- --------
Total assets............................................ $245,644 $198,825
======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable.................................... $ 29,945 $ 29,513
Accrued expenses.......................................... 14,606 15,074
Deferred income taxes, current............................ 291 274
Other current liabilities................................. 142 91
-------- --------
Total current liabilities............................... 44,984 44,952
DEFERRED INCOME TAXES, non-current........................ 3,425 3,406
ENVIRONMENTAL CONTINGENCIES AND OTHER LIABILITIES......... 8,485 8,348
LONG TERM DEBT............................................ 161,803 112,413
-------- --------
Total liabilities....................................... 218,697 169,119
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......... 4,461 4,304
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 6,000,000 shares
authorized; 3,440,983 shares issued and outstanding as
of September 30, 2000 and 3,441,983 as of December 31,
1999.................................................... 3 3
Common stock warrants..................................... 663 663
Additional paid-in capital................................ 32,130 32,140
Notes receivable from stockholders........................ (756) (764)
Accumulated deficit....................................... (8,884) (7,083)
Accumulated other comprehensive income.................... (1,045) 68
-------- --------
Total stockholders' equity.............................. 22,111 25,027
-------- --------
Total liabilities, redeemable preferred stock and
stockholders' equity.................................. $245,644 $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 AND NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND OCTOBER 2, 1999
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
------------- ---------- ------------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUES.................................... $ 73,816 $ 65,761 $ 216,522 $ 198,458
COST OF GOODS SOLD.............................. 62,262 55,105 184,083 167,889
========== ========== ========== ==========
GROSS PROFIT.................................... 11,554 10,656 32,439 30,569
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.... 7,628 7,207 20,522 19,076
========== ========== ========== ==========
INCOME FROM CONTINUING OPERATIONS............... 3,926 3,449 11,917 11,493
INTEREST EXPENSE, net........................... 4,393 3,423 12,426 10,095
OTHER EXPENSE (Income) net...................... -- 51 -- (367)
========== ========== ========== ==========
INCOME (LOSS) BEFORE INCOME TAX PROVISION....... (467) (25) (509) 1,765
PROVISION FOR INCOME TAXES...................... 543 238 1,119 1,271
========== ========== ========== ==========
NET INCOME (LOSS)............................... (1,010) (263) (1,628) 494
ACCRETION OF PREFERRED STOCK.................... (53) (53) (157) (157)
PREFERRED STOCK DIVIDENDS....................... (9) (9) (28) (28)
========== ========== ========== ==========
NET INCOME (LOSS) ATRIBUTABLE TO COMMON
STOCKHOLDERS.................................. (1,072) (325) (1,813) 309
========== ========== ========== ==========
OTHER COMPREHENSIVE INCOME (LOSS) FOREIGN
CURRENCY TRANSLATION ADJUSTMENT............... (609) (368) (1,113) 291
---------- ---------- ---------- ----------
COMPREHENSIVE INCOME (LOSS)..................... (1,619) (631) (2,741) 785
========== ========== ========== ==========
EARNINGS (LOSS) PER SHARE: NET INCOME (LOSS) PER
SHARE
Basic......................................... $ (0.29) $ (0.08) $ (0.47) $ 0.14
Diluted....................................... -- (0.08) -- 0.14
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Basic......................................... $ (0.31) $ (0.09) $ (0.53) $ 0.09
Diluted....................................... -- (0.09) -- 0.09
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
Basic......................................... 3,441,650 3,441,983 3,441,899 3,444,914
Diluted....................................... -- 3,441,983 -- 3,583,414
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
AND OCTOBER 2, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, OCTOBER 2,
2000 1999
------------- ----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ (1,628) $ 494
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 9,055 6,128
Amortization of deferred financing costs.................. 998 975
Provision for doubtful accounts........................... 351 608
Deferred income taxes..................................... 38 --
Change in operating assets and liabilities, net of effect of
Acupac Packaging and Bradcan Corporation (1999), Precision
Packaging & Services, Inc. and Ivers-Lee (2000):
Trade accounts receivables................................ 2,418 (7,175)
Other receivables......................................... (327) (429)
Inventories............................................... (1,274) (7,423)
Prepaid expenses and other current assets................. (833) (574)
Other assets.............................................. 210 (176)
Accounts payable.......................................... (2,309) 2,092
Accrued expenses and other liabilities.................... (2,509) (3,768)
-------- --------
Net cash provided by (used in) operating activities......... 4,190 (9,248)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (4,084) (3,128)
Short-term investments...................................... (10) --
Sale of property, plant and equipment....................... 45 262
Acquisition of Acupac Packaging and Bradcan Corporation, net
of cash (1999), Precision Packaging & Services, Inc. and
Ivers-Lee, net of cash (2000)............................. (47,632) (10,530)
-------- --------
Net cash used in investing activities....................... $(51,681) $(13,396)
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
AND OCTOBER 2, 1999 (UNAUDITED) (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, OCTOBER 2,
2000 1999
------------- ----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVTIES:
Net borrowing on revolving loans............................ $ 49,390 $ 15,591
Dividends on preferred stock................................ (28) (28)
Increase in deferred financing costs........................ (350)
Repurchase of management stock.............................. (2) (124)
-------- --------
Net cash provided by financing activities................... 49,010 15,439
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (526) 44
-------- --------
NET INCREASE (DECREASE) IN CASH............................. 993 (7,161)
CASH, beginning of period................................... 2,530 8,747
-------- --------
CASH, end of period......................................... $ 3,523 $ 1,586
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the nine month period:
Interest.................................................. $ 13,891 $ 12,296
======== ========
Income taxes.............................................. $ 1,913 $ 1,015
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Accretion attributable to preferred stock................... $ 157 $ 157
======== ========
The Company acquired all the capital stock of Acupac
Packaging (1999) and some of the assets of Bradcan
Corporation (1999), Precision Packaging Services, Inc. and
Ivers-Lee (2000)
In conjunction with the acquisition, liabilities were
assumed as follows:
Fair value of assets...................................... $ 20,031 $ 5,390
Intangible assets acquired................................ 33,050 8,506
Cash paid for capital stock............................... (41,318) (9,733)
Cash paid for assets...................................... (6,000) (797)
-------- --------
Liabilities assumed....................................... $ 5,763 $ 3,366
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND OCTOBER 2, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements included herein have
been prepared by Outsourcing Services Group, Inc. ("OSG" or the "Company")
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Certain information and footnote disclosures,
normally included in financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted pursuant to such
SEC rules and regulations; nevertheless, the management of the Company believes
that the disclosures herein are adequate to make the information presented not
misleading.
In the opinion of management, the condensed consolidated financial
statements included herein reflect adjustments consisting only of normal
recurring adjustments necessary to present fairly the consolidated financial
position of the Company as of September 30, 2000, and December 31, 1999, the
results of its operations for the three and nine month periods ended
September 30, 2000 and October 2, 1999 and its cash flows for the nine month
periods ended September 30, 2000 and October 2, 1999. The results of operations
for the interim periods are not necessarily indicative of the results of
operations for the full year.
2. NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivatives and Hedging Activities". 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 adoptions 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 September 30, 2000 and
December 31, 1999:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials....................................... $23,822 $23,045
Work-in-process..................................... 4,816 4,428
Finished goods...................................... 9,584 6,344
------- -------
38,222 33,817
Less reserve for excess and obsolete inventories.... (3,827) (2,969)
------- -------
$34,395 $30,848
======= =======
</TABLE>
7
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND OCTOBER 2, 1999
(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
8
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND OCTOBER 2, 1999
(UNAUDITED)
4. CONTINGENCIES (CONTINUED)
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 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 September 30, 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 September 30, 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
9
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND OCTOBER 2, 1999
(UNAUDITED)
4. CONTINGENCIES (CONTINUED)
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 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 ACQUISITIONS
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,
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
$42.1 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.
On August 25, 2000, pursuant to a stock purchase agreement the Company
acquired all of the outstanding stock of Ivers-Lee Limited ("Ivers-Lee"), and
TMJ Specialty Tool and Design Limited ("TMJ"), corporations organized under the
laws of Ontario (together, Ivers-Lee and TMJ are the "Companies" and each a
"Company"), Ken Young Family Trust (the "Trust"), Pallasade Holdings Inc., a
corporation organized under the laws of Ontario ("Pallasade"; together with the
Trust, the "Ivers-Lee Shareholders"), and Elizabeth Young (the "TMJ
Shareholder", together with the Ivers-Lee Shareholders, the "Sellers") for
approximately $5.7 million. Ivers-Lee is primarily a provider of outsourced
packaging services to the health and beauty aids, household and consumer product
markets for some of the largest U.S. consumer product companies. The Company
plans for Ivers-Lee to continue in this line of business. The Company drew
against its existing revolving credit facility to pay Sellers.
10
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND OCTOBER 2, 1999
(UNAUDITED)
5. BUSINESS ACQUISITIONS (CONTINUED)
Both acquisitions have 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 Acquisition Date. 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
and Ivers-Lee 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
September 30, 2000 and the condensed combined statements of operations and cash
flows for the nine month period ended September 30, 2000 of the Guarantors,
representing Kolmar, ASC, Piedmont, Acupac and Precision and the non-guarantors
which consist of Kolmar Canada, Ivers-Lee, 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 nine month
period ended September 30, 2000.
11
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND OCTOBER 2, 1999
(UNAUDITED)
6. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONDENSED COMBINED BALANCE SHEET AT SEPTEMBER 30, 2000
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED NON- CONSOLIDATED
GUARANTORS GUARANTORS OSG ELIMINATIONS TOTAL
---------- ---------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents, short-term
investments......................... $ 2,413 $ 1,343 $ 31 $ -- $ 3,787
Accounts receivable, net.............. 33,665 6,687 -- -- 40,352
Other receivables..................... (741) 39 3,401 -- 2,699
Inventories........................... 29,991 4,404 -- -- 34,395
Prepaid expenses and other current
assets.............................. 5,013 564 29 -- 5,606
-------- -------- -------- --------- --------
Total current assets.................. 70,341 13,037 3,461 -- 86,839
Property, plant and equipment, net.... 37,259 5,424 89 -- 42,772
Goodwill, net......................... 93,689 8,748 -- -- 102,437
Intercompany receivable (payable)..... 19,000 (30,058) 11,058 -- --
Investment in subsidiaries............ -- -- 146,847 (146,847) --
Other long-term assets................ 7,807 33 5,756 -- 13,596
-------- -------- -------- --------- --------
Total Assets.......................... $228,096 $ (2,816) $167,211 $(146,847) $245,644
======== ======== ======== ========= ========
LIABILITIES:
Current Liabilities:
Accounts payable...................... $ 27,482 $ 2,463 $ -- $ -- $ 29,945
Other current liabilities............. 11,581 2,315 1,143 -- 15,039
-------- -------- -------- --------- --------
Total current liabilities............. 39,063 4,778 1,143 -- 44,984
Long-term debt, less current
portion............................. 56,803 -- 105,000 -- 161,803
Other liabilities..................... 11,891 19 -- -- 11,910
Intercompany loan..................... (13,410) (11,905) 25,315 -- --
Redeemable preferred stock............ -- -- 4,836 -- 4,836
Stockholders' equity.................. 133,749 4,292 30,917 (146,847) 22,111
-------- -------- -------- --------- --------
Total Liabilities, Redeemable
Preferred Stock and Stockholders'
Equity.............................. $228,096 $ (2,816) $167,211 $(146,847) $245,644
======== ======== ======== ========= ========
</TABLE>
12
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND OCTOBER 2, 1999
(UNAUDITED)
6. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED NON- CONSOLIDATED
GUARANTORS GUARANTORS OSG ELIMINATIONS TOTAL
---------- ---------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net revenues........................... $196,968 $19,998 $ -- $(444) $216,522
Cost of goods sold..................... 167,662 16,865 -- (444) 184,083
-------- ------- ------- ----- --------
Gross profit........................... 29,306 3,133 -- -- 32,439
Selling, general and administrative
expenses............................. 18,053 2,283 186 -- 20,522
-------- ------- ------- ----- --------
Income (loss) from operations.......... 11,253 850 (186) -- 11,917
Interest expense, net.................. 4,314 591 7,521 -- 12,426
Other expense (income) net............. 5,713 -- (5,713) -- --
-------- ------- ------- ----- --------
Income (loss) before income tax
provision............................ 1,226 259 (1,994) -- (509)
Provision (benefit) for income taxes... 1,622 212 (715) -- 1,119
-------- ------- ------- ----- --------
Net income (loss)...................... $ (396) $ 47 $(1,279) $ -- $ (1,628)
======== ======= ======= ===== ========
</TABLE>
13
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND OCTOBER 2, 1999
(UNAUDITED)
6. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONDENSED COMBINED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON- CONSOLIDATED
GUARANTORS GUARANTORS OSG ELIMINATIONS TOTAL
---------- ---------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)..................... $ (396) $ 47 $ (1,279) $ -- $(1,628)
Total adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities... 6,086 391 (47,977) 47,318 5,818
-------- -------- -------- ------- -------
Net cash provided by (used in)
operating activities................ 5,690 438 (49,256) 47,318 4,190
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.................. (3,496) (540) (48) -- (4,084)
Short-term investments................ (10) -- -- (10)
Acquisitions of Precision Packaging
and Ivers-Lee, net of cash
required............................ (42,156) (5,476) -- -- (47,632)
Sales of property, plant or equipment,
net................................. 20 25 -- -- 45
-------- -------- -------- ------- -------
Net cash used in investing
activities.......................... (45,642) (5,991) (48) -- (51,681)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowing on revolving loans...... 49,390 -- -- -- 49,390
Dividends on preferred stock.......... -- -- (28) -- (28)
Increase in deferred finance cost..... -- -- (350) (350)
Repayment (borrowing) of debt due to
affiliate........................... (3,371) 2,985 47,704 (47,318) --
Repurchase of management stock........ -- -- (2) (2)
Additional paid-in
capital--Acquisition................ (3,853) 3,853 -- -- --
Payment of divdends................... (1,976) -- 1,976 --
-------- -------- -------- ------- -------
Net cash (provided by) used in
financing activities................ 40,190 6,838 49,300 (47,318) 49,010
Effect of exchange rate changes on
cash................................ -- (526) -- -- (526)
-------- -------- -------- ------- -------
Net increase (decrease) in cash....... 238 759 (4) -- 993
Cash, beginning of period............. 1,911 584 35 -- 2,530
-------- -------- -------- ------- -------
Cash, end of period................... $ 2,149 $ 1,343 $ 31 $ -- $ 3,523
======== ======== ======== ======= =======
</TABLE>
14
<PAGE>
OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND OCTOBER 2, 1999
(UNAUDITED)
7. BUSINESS SEGMENT INFORMATION
The Company operates predominantly in one business segment. The company
provides contract manufacturing for consumer products manufacturers and
distributors in the health and beauty aids, colored cosmetics, aerosol products
such as high-end hair spray and shaving creams and gels. The Company has
operating facilities in the U.S., Mexico, Canada.
Net revenues, income from operations, identifiable assets and depreciation
and amortization by geographic region for the nine months ended September 30,
2000, are as follows:
<TABLE>
<CAPTION>
NINE MONTH PERIOD
----------------------------------------------------
UNITED
STATES MEXICO CANADA OTHER TOTAL
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenues.................................. $196,524 $7,663 $12,335 $ -- $216,522
Income from operations........................ 11,067 389 513 (52) 11,917
Identifiable assets........................... 218,402 6,739 19,709 794 245,644
Depreciation and amortization................. 8,363 183 466 43 9,055
</TABLE>
<TABLE>
<CAPTION>
THREE MONTH PERIOD
----------------------------------------------------
UNITED
STATES MEXICO CANADA OTHER TOTAL
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenues.................................. $ 65,532 $3,253 $ 5,031 $ -- $ 73,816
Income from operations........................ 3,090 556 304 (24) 3,926
Identifiable assets........................... 218,402 6,739 19,709 794 245,644
Depreciation and amortization................. 2,942 58 231 14 3,245
</TABLE>
Net revenues, income from operations, identifiable assets and depreciation
and amortization by geographic region for the nine month period ended
October 2, 1999 are as follows:
<TABLE>
<CAPTION>
NINE MONTH PERIOD
----------------------------------------------------
UNITED
STATES MEXICO CANADA OTHER TOTAL
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenues.................................. $180,934 $7,867 $ 9,657 $ -- $198,458
Income from operations........................ 10,303 694 417 79 11,493
Identifiable assets........................... 200,243 4,622 10,838 478 216,181
Depreciation and amortization................. 5,640 193 253 42 6,128
</TABLE>
<TABLE>
<CAPTION>
THREE MONTH PERIOD
----------------------------------------------------
UNITED
STATES MEXICO CANADA OTHER TOTAL
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenues.................................. $ 58,409 $2,948 $ 4,404 $ -- $ 65,761
Income from operations........................ 2,868 422 136 23 3,449
Identifiable assets........................... 200,243 4,622 10,838 478 216,181
Depreciation and amortization................. 1,940 71 94 33 2,138
</TABLE>
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS.
GENERAL
Outsourcing Services Group, Inc. (the "Company" or "OSG") is a leading
provider of outsourced manufacturing and packaging services to the health and
beauty aid, household, and automotive consumer product markets in North America.
OSG primarily manufactures and/or packages health and beauty aid products, such
as colored cosmetics, lipsticks, facial powders, skin care creams and lotions,
hair spray and gel, hair mousse, shampoo, and shaving cream and gel. Other
products manufactured and packaged by the Company include household and
automotive products, such as lubricants, tire sealers, cleaners, and lighter
fluid. OSG offers its customers a complete range of services, including product
development, formulation, blending, manufacturing, filling, and packaging. It
also provides ancillary services such as materials procurement, warehousing, and
distribution of finished goods.
RESULTS OF OPERATIONS
For the nine and three month periods ended September 30, 2000 compared to
the nine and three month periods ended October 2, 1999.
NET REVENUE. Revenues of $216.5 and $73.8 million for the nine and three
month periods ended September 30, 2000 increased by approximately $18.0 million
(9.1%) and $8.1 million (12.2%), respectively, from the prior 1999 periods. The
increases for the nine and three month periods are primarily attributable to the
acquisitions of Acupac, Precision, and Ivers-Lee which contributed
$9.0 million, $23.4 million and $1.0 million respectively for a net revenue
increase of $33.4 million for the nine months ended September 30, 2000, offset
by a decrease in sales of $15.3 million which was higher in the first nine
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 $184.0 million and $62.2 million
for the nine and three month periods ended September 30, 2000, increased by
approximately $16.2 million (9.6%) and $7.2 million (13.0%) respectively, from
the prior 1999 period. Total cost of goods sold, as a percentage of sales,
increased slightly to 85.0% and 84.3% for the nine and three month periods from
84.6% and 83.8% from the prior 1999 periods. The increase was attributable to
the acquisition of Acupac, Precision and Ivers-Lee. They contributed
$7.2 million, $18.6 million and $0.7 million respectively, to the cost of goods
sold for the nine months ended September 30, 2000 offset by a decrease in cost
of goods sold of $10.3 million.
SG&A EXPENSES. Selling, general and administrative expenses ("SG&A") of
$20.5 million and $7.6 million for the nine and three month periods ended
September 30, 2000, increased by approximately $1.4 million (7.6%) and increased
by $0.4 million (5.8%), respectively, from the prior 1999 periods. The increase
was attributable to the acquisition of Acupac, Precision and Ivers-Lee. Their
total SG&A was $1.6 million, $1.7 million and $0.1 million, respectively, for
the nine months ended September 30, 2000. As a percentage of net revenues, SG&A
increased slightly to 9.5% and 10.3%, respectively, for the nine and three month
periods ended September 30, 2000. Also, for the nine month period ending
September 30, 2000 the Company has incurred $1.3 million of non-recurring
expenses for manufacturing consulting services at one of its Kolmar locations.
INTEREST EXPENSE. Interest expense of $12.4 million and $4.4 million for
the nine and three month periods ended September 30, 2000, increased by
approximately $2.3 million (23.1%) and $1.0 million (28.3%), from the prior 1999
periods. Total indebtedness increased $41.2 million from $120.6 million at
October 2, 1999 to $161.8 million at September 30, 2000. The increase in debt
and related interest
16
<PAGE>
expense was primarily attributable to the acquisition of Precision on
February 29, 2000 and the acquisition of Ivers-Lee on August 25, 2000.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, OSG had cash and cash equivalents of
$3.5 million, working capital of $41.9 million and long-term debt of
$161.8 million. The primary sources of cash were from financing activities due
to the acquisition of Precision Packaging and Services on February 29, 2000 and
Ivers-Lee on August 25, 2000. Principal uses of cash were for capital
expenditures, acquisition, and interest payments. Cash provided by (used in)
operations was $4.2 million and $(9.2) million for the nine month period ended
September 30, 2000 and October 2, 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 September 29, 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
17
<PAGE>
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-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.
18
<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
------ ------- ----
<S> <C> <C>
11. Statement of computation of basic and diluted net 21
income per share
27. Financial data schedule Filed electronically
</TABLE>
(B) REPORTS ON FORM 8-K*
* Previously filed.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
OUTSOURCING SERVICES GROUP, INC.
Dated: November 14, 2000 /s/ JOSEPH M. HEALY
------------------------------------------------
Joseph M. Healy
CHIEF EXECUTIVE OFFICER, PRESIDENT
AND DIRECTOR (PRINCIPAL EXECUTIVE OFFICER)
Dated: November 14, 2000 /s/ PERRY MORGAN
------------------------------------------------
Perry Morgan
CHIEF FINANCIAL OFFICER
VICE PRESIDENT AND SECRETARY
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
</TABLE>
20
