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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

/x/	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2001
Commission File Number: 333-57209

OUTSOURCING SERVICES GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		33-0597491 (I.R.S. Employer Identification No.)
25 Commerce Drive, Allendale, NJ (Address of principal executive offices)		07401 (Zip Code)

(Registrant's telephone number, including area code)
(201) 785-1333

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 March 31, 2001: 3,373,265 shares.

OUTSOURCING SERVICES GROUP, INC.

INDEX TO FORM 10-Q

PART I.		Financial Information
ITEM 1.		Financial Statements

		Page
	Condensed Consolidated Balance Sheets as of March 31, 2001 (unaudited) and December 31, 2000	3
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2001 and April 1, 2000 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2001 and April 1, 2000 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
PART II.	Other Information	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

OUTSOURCING SERVICES GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

			March 31, 2001			December 31, 2000
			(Unaudited)
ASSETS
CURRENT ASSETS:
	Cash		$	4,390		$	3,801
	Short-term investments			258			254
	Accounts receivable, net			47,780			47,928
	Other receivables			1,721			1,815
	Income tax receivable			81			—
	Inventories, net			34,375			32,907
	Prepaid expenses and other current assets			1,751			1,043
	Deferred income taxes, current			4,551			4,551

		Total current assets		94,907			92,299
	PROPERTY AND EQUIPMENT, net			42,731			43,057
	GOODWILL, net			100,133			102,272
	DEFERRED INCOME TAXES, non-current			2,702			2,702
	DEFERRED FINANCING COSTS, net			5,026			5,260
	ENVIRONMENTAL INSURANCE RECEIVABLE			350			350
	DUE FROM CCL			7,126			7,126
	OTHER ASSETS			627			602

		TOTAL ASSETS	$	253,602		$	253,668

LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
	Trade accounts payable		$	39,277		$	33,067
	Accrued expenses			14,482			18,621
	Deferred income taxes, current			339			339
	Income tax payable			—			186
	Other current liabilities			113			108

		Total current liabilities		54,211			52,321
	DEFERRED INCOME TAXES, non-current			3,522			3,522
	ENVIRONMENTAL CONTINGENCIES AND OTHER LIABILITIES			11,293			11,774
	LONG-TERM DEBT			162,034			161,447

		Total liabilities		231,060			229,064
	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			4,567			4,514
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 6,000,000 shares authorized; 3,373,265 shares issued and outstanding as of March 31, 2001 and 3,375,483 as of December 31, 2000				3			3
	Common stock warrants			663			663
	Additional paid-in capital			29,939			31,092
	Notes receivable from stockholders			(580	)		(740	)
	Accumulated deficit			(11,126	)		(10,870	)
	Accumulated other comprehensive loss			(1,299	)		(433	)

		Total stockholders' equity		17,600			19,715

		TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY	$	253,602		$	253,668

See notes to condensed consolidated financial statements.

OUTSOURCING SERVICES GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND APRIL 1, 2000

(Dollars in thousands, except for per share data)

(Unaudited)

	Three Months Ended
	March 31, 2001			April 1, 2000
NET REVENUES	$	81,022		$	68,212
COST OF GOODS SOLD		68,876			58,364

GROSS PROFIT		12,146			9,848
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		7,623			6,394

INCOME FROM OPERATIONS		4,523			3,454
INTEREST EXPENSE, NET		4,361			3,727

INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES		162			(273	)
PROVISION FOR INCOME TAXES		356			528

NET LOSS	$	(194	)	$	(801	)
ACCRETION AND DIVIDENDS ON PREFERRED STOCK		(62	)		(62	)

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS		(256	)		(863	)

OTHER COMPREHENSIVE INCOME (LOSS):
FOREIGN CURRENCY TRANSLATION ADJUSTMENT		(866	)		31

COMPREHENSIVE LOSS	$	(1,060	)	$	(770	)

LOSS PER SHARE, BASIC AND DILUTED	$	(0.06	)	$	(0.23	)

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(0.08	)	$	(0.25	)

WEIGHTED AVERAGE COMMON SHARES, BASIC AND DILUTED		3,374,390			3,441,983

See notes to condensed consolidated financial statements.

OUTSOURCING SERVICES GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND APRIL 1, 2000

(Dollars in thousands)

(Unaudited)

				Three Months Ended
				March 31, 2001			April 1, 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net loss			$	(194	)	$	(801	)
	Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
		Depreciation and amortization			3,335			2,654
		Amortization of deferred financing costs			409			321
		Provision for doubtful accounts			138			184
		Deferred income taxes			—			2
	Change in operating assets and liabilities:
		Trade accounts receivables			10			466
		Other receivables			94			(1,948	)
		Inventories			(1,468	)		(1,313	)
		Prepaid expenses			(708	)		(503	)
		Other assets			(25	)		1,189
		Accounts payable			6,210			(2,093	)
		Income tax payable/receivable			(267	)		—
		Accrued expenses and other liabilities			(2,262	)		(1,391	)

			Net cash provided by (used in) operating activities		5,272			(3,233	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures					(1,595	)		(811	)
Sale of property, plant and equipment					28			5
Acquisition of Precision Packaging, net of cash acquired					—			(42,429	)
Acquisition of Ivers-Lee					(2,353	)		—

			Net cash used in investing activities		(3,920	)		(43,235	)

See notes to condensed consolidated financial statements.

OUTSOURCING SERVICES GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND APRIL 1, 2000 (Continued)

(Dollars in thousands)

(Unaudited)

		March 31, 2001			April 1, 2000
CASH FLOWS FROM FINANCING ACTIVTIES:
Net borrowing on revolving loans		$	587		$	47,468
Dividends on preferred stock			(9	)		(9	)
Restructuring cost on revolving loan			(175	)		(350	)
Proceeds, repurchase/cancellation of stock			(993	)		—

	Net cash (used in) provided by financing activities	$	(590	)	$	47,109

EFFECT OF EXCHANGE RATE CHANGES ON CASH			(173	)		(59	)

NET INCREASE IN CASH			589			582
CASH, beginning of period			3,801			2,530

CASH, end of period		$	4,390		$	3,112

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the quarter for:
	Interest	$	6,967		$	5,709

	Income taxes	$	493		$	140

SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Accretion attributable to preferred stock		$	53		$	53

The Company acquired all the capital stock of Precision Packaging 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

See notes to condensed consolidated financial statements.

OUTSOURCING SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND APRIL 1, 2000

(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 March 31, 2001 and April 1, 2000, the results of its operations and cash flows for the three month periods ended March 31, 2001 and April 1, 2000. 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

Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company adopted SFAS 133 effective January 1, 2001. The Company does not hold any derivative instruments or embedded derivative instruments therefore, the adoption of SFAS 133 did not have an impact on the financial position, results of operations, or cash flows of the Company.

3. Inventories

Inventories consisted of the following at March 31, 2001 and December 31, 2000:

	March 31, 2001			December 31, 2000
	(in thousands)
Raw Material	$	26,939		$	25,300
Work-in-process		5,388			6,171
Finished goods		5,814			5,945

		38,141			37,416
Less reserve for excess and obsolete inventories		(3,766	)		(4,509	)

	$	34,375		$	32,907

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 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 and the ASC 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

offsets to the Company's rental obligations in the event that the Company incurs liability for such an indemnified matter. Based on this indemnity, the lease 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 and the final post-remediation facility inspection was completed in December 1999. Final clean-up costs of $6.7 million were incurred and funded through insurance. Post-remediation monitoring expected to last through 2005, commenced in year 2000 and is expected to cost $350,000, which is currently accrued. 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 $9,000,000 as of March 31, 2001 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 March 31, 2001 of $920,000 that includes potential liabilities related to the Orange County Landfill, located in New York State and the Union Metals Property (neighboring property of Imperial Cosmetics Division). In each of the above mentioned claims, Kolmar has certain indemnification rights ($250,000 deductible) against CCL for these claims.

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. Based on the Company's current estimates of reasonably possible remediation costs, the Company has established a $70,000 reserve.

While it is impossible at this time to determine with certainty the ultimate outcome of the environmental matters referred to above, management believes that adequate provisions have been made for probable losses with respect thereto and that the ultimate outcome, after provisions therefore, will not have a material adverse effect on the consolidated financial position, results of operations or cash flows 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.

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 propellants could materially adversely affect the Company's business if the industry does not develop propellant 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 propellant 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, results of operations, or cash flows of the Company.

5. Business Acquisition

On April 12, 2001, the Company announced the signing of a letter of intent with Procter & Gamble ("P&G") to acquire land, building and equipment located in North Norwich, New York and to enter into a Product Supply Agreement ("PSA") for five years. Under the "PSA", the Company will make prescriptions and over-the-counter pharmaceutical products at the plant. Both parties are targeting for the sale to be completed no later than June 30, 2001.

6. Business Segment Information

The Company operates multiple business segments specializing in the manufacturing and packaging of aerosol and liquid products, color cosmetics, and unit dose product delivery. The Company provides contract manufacturing and packaging including unit dose packaging, for the color cosmetics, personal care, household, automotive care and pharmaceutical markets. The Company has operating facilities in the U.S., Mexico, and Canada.

The Company is divided into three operating divisions whose respective members are as follows: Kolmar Division-the Kolmar Group, Aerosol, Liquid Division—ASC, Piedmont and Precision and Unit Dose Division-Acupac and Ivers-Lee.

OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND APRIL 1, 2000 (Continued)

(Unaudited)

6. Business Segment Information (Continued)

Net revenues, income from operations, identifiable assets and depreciation and amortization by business segment for the three months ended March 31, 2001, are as follows:

	Kolmar Division		Aerosol, Liquid Division		Unit Dose Division		Corporate		Total
	(Dollars in thousands)
Net revenues	$	35,582	$	39,229	$	6,211	$	—	$	81,022
Income from operations		3,019		1,266		12		226		4,523
Identifiable assets		116,615		104,275		21,019		11,693		253,602
Depreciation and amortization		1,085		1,967		283		—		3,335

Net revenues, income from operations, identifiable assets and depreciation and amortization by business segment for the three months ended April 1, 2000, are as follows:

	Kolmar Division		Aerosol, Liquid Division		Unit Dose Division		Corporate		Total
	(Dollars in thousands)
Net revenues	$	26,504	$	36,832	$	4,876	$	—	$	68,212
Income from operations		894		1,799		248		513		3,454
Identifiable assets		116,079		108,427		14,643		6,628		245,777
Depreciation and amortization		1,050		1,410		194		—		2,654

Net revenues, income (loss) from operations, identifiable assets and depreciation and amortization by geographic region for the three months ended March 31, 2001, are as follows:

	United States		Mexico		Canada		Other (1)			Total
	(Dollars in thousands)
Net revenues	$	68,234	$	3,285	$	9,503	$	—		$	81,022
Income (loss) from operations		3,290		263		977		(7	)		4,523
Identifiable assets		223,428		5,843		23,626		705			253,602
Depreciation and amortization		3,014		60		248		13			3,335

Net revenues, income (loss) from operations, identifiable assets and depreciation and amortization by geographic region for the three months ended April 1, 2000, are as follows:

	United States		Mexico		Canada		Other (1)			Total
	(Dollars in thousands)
Net revenues	$	62,152	$	2,354	$	3,706	$	—		$	68,212
Income (loss) 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

(1): Other—Includes financial data for the Kolmar (Aust.) Pty. Limited and Kolmar Laboratories, Inc. (London)

OUTSOURCING SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND APRIL 1, 2000 (Continued)

(Unaudited)

7. 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 March 31, 2001 and the condensed combined statements of operations and cash flows for the three month period ended March 31, 2001, 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, Kolmar Laboratories, Inc. (London) and Ivers-Lee. 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 March 31, 2001.

Condensed Combined Balance Sheet At March 31, 2001 (Unaudited)
(Dollars in thousands)

	Combined Guarantors			Nonguarantors			OSG			Eliminations			Consolidated Total
ASSETS:
Current Assets:
Cash and short term investments	$	3,547		$	990		$	111		$	—		$	4,648
Accounts receivable, net		39,492			8,288			—			—			47,780
Other receivables		(2,503	)		(110	)		4,415			—			1,802
Inventories		28,971			5,404			—			—			34,375
Prepaid expenses and other current assets		5,290			334			678			—			6,302

Total current assets		74,797			14,906			5,204			—			94,907
Property and equipment, net		36,906			5,171			654			—			42,731
Goodwill, net		90,079			10,054			—			—			100,133
Intercompany receivable (payable)		47,686			(4,456	)		(43,230	)		—			—
Investment in subsidiaries		—			—			108,207			(108,207	)		—
Other long-term assets		9,955			41			5,835			—			15,831

Total assets	$	259,423		$	25,716		$	76,670		$	(108,207	)	$	253,602

LIABILITIES:
Current Liabilities:
Accounts payable	$	33,007		$	5,528		$	742		$	—		$	39,277
Other current liabilities		9,146			1,889			3,899			—			14,934

Total current liabilities		42,153			7,417			4,641			—			54,211
Long-term debt, less current portion		57,034			—			105,000			—			162,034
Other liabilities		14,750			18			47			—			14,815
Intercompany loan		51,558			11,257			(62,815	)		—			—
Redeemable preferred stock		—			—			4,942			—			4,942
Stockholders' equity		93,928			7,024			24,855			(108,207	)		17,600

Total liabilities, redeemable preferred stock and stockholders' equity	$	259,423		$	25,716		$	76,670		$	(108,207	)	$	253,602

Condensed Combined Statement of Operation for the Three Months ended March 31, 2001 (Unaudited)
(Dollars in thousands)

	Combined Guarantors		Nonguarantors		OSG			Eliminations			Consolidated Total
Net Revenues	$	68,281	$	12,788	$	—		$	(47	)	$	81,022
Cost of goods sold		58,649		10,274		—			(47	)		68,876

Gross profit		9,632		2,514		—			—			12,146
Selling, general and administrative expense		6,568		1,281		(226	)		—			7,623

Income from operations		3,064		1,233		226			—			4,523
Interest expense, net		1,485		224		2,652			—			4,361

Income (loss) before provision for income taxes		1,579		1,009		(2,426	)		—			162
Provision (benefit) for income taxes		319		267		(230	)		—			356

Net income (loss)	$	1,260	$	742	$	(2,196	)	$	—		$	(194	)

Condensed Combined Statement of Cash Flows For The Three Months Ended March 31, 2001
(Unaudited)
(Dollars in thousands)

	Combined Guarantors			Nonguarantors			OSG			Eliminations		Consolidated Total
Cash flows from operating activities
Net income, (loss)	$	1,260		$	742		$	(2,196	)	$	—	$	(194	)
Total adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities		3,940			2,435			(909	)		—		5,466

Net cash provided by (used in) operating activities		5,200			3,177			(3,105	)		—		5,272
Cash flows from investing activities
Capital expenditures		(937	)		(223	)		(435	)		—		(1,595	)
Acquisition of Ivers-Lee		—			—			(2,353	)		—		(2,353	)
Sales of property, plant or equipment, net		—			28			—			—		28

Net cash used in investing activities		(937	)		(195	)		(2,788	)		—		(3,920	)
Cash flows from financing activities
Net borrowing on revolving loan		587			—			—			—		587
Dividends on preferred stock		—			—			(9	)		—		(9	)
Increase in deferred finance cost		—			—			(175	)		—		(175	)
Repayment (borrowing) of debt due to affiliates		(2,159	)		(2,542	)		4,701			—		—
Proceeds, repurchase/cancellation of stock		(1,125	)		—			132			—		(993	)
Payment of dividends		(1,350	)		—			1,350			—		—

Net cash provided by (used in) financing activities		(4,047	)		(2,542	)		5,999			—		(590	)
Effect of exchange rate changes on cash		—			(173	)		—			—		(173	)

Net increase (decrease) in cash		216			267			106			—		589
Cash, beginning of period		3,073			723			5			—		3,801

Cash, end of period	$	3,289		$	990		$	111		$	—	$	4,390

OUTSOURCING SERVICES GROUP, INC.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS.

General

Outsourcing Services Group, Inc. (the "Company" or "OSG"), through its operating subsidiaries, ASC, Piedmont, Kolmar, Acupac, Precision and Ivers-Lee is a full-service contract manufacturer and packager of consumer products for marketers in the health and beauty aid, personal care, pharmaceutical and over-the-counter drug markets, household and automotive consumer product markets. The Company manufactures and packages a broad range of products including color cosmetics (such as lipstick, face powders and eye shadow), aerosols (such as hair spray, shaving cream and gel and lubricants), creams, lotions and liquids (such as skin care products, shampoo, pump hair spray and household cleaning products), pharmaceutical and over-the-counter drugs (such as allergy/cold remedies and pain relief products). Management believes OSG is the largest independent contract manufacturer and packager of color cosmetics, high-end salon aerosol hair care products and shaving creams and gels in North America.

Results Of Operations

For the three months ended March 31, 2001 compared to the three months ended April 1, 2000.

Net Revenue. Net revenues increased by approximately $12.8 million, or 18.8% to $81.0 million for the three month period ended March 31, 2001 from $68.2 million for the three month period ended April 1, 2000. The increase was primarily attributable to the Kolmar Division which contributed $9.1 million and the acquisitions of Precision and Ivers-Lee which contributed $5.2 million and $2.6 million, respectively, for the three months ended March 31, 2001, partially offset by decreases at the ASC plant located in California of ($2.7) million due to power outages sustained at the plant.

Cost of Goods Sold. Cost of goods sold increased by approximately $10.5 million, or 18.0% to $68.9 million for the three month period ended March 31, 2001 from $58.4 million for the three month period ended April 1, 2000. Total cost of goods sold, as a percentage of sales, decreased slightly to 85.0% for the three month period ended March 31, 2001 from 85.6% for the three month period ended April 1, 2000. The increase in dollars was attributable to the Kolmar Division which contributed $7.3 million and the acquisition of Precision and Ivers-Lee which contributed $4.0 million and $2.0 million, respectively, for the three months ended March 31, 2001, partially offset by decreases at the ASC plant of ($1.7) million due to the aforementioned power outages.

SG&A Expenses. Selling, general and administrative expenses ("SG&A") increased approximately by $1.2 million or 19.2% to $7.6 million for the three month period ended March 31, 2001 from $6.4 million for the three month period ended April 1, 2000. The increase was attributable to the acquisition of Precision and Ivers-Lee which contributed $0.8 million and $0.4 million respectively, for the three months ended March 31, 2001. As a percentage of net revenues, SG&A remains the same at 9.4% for the three month periods ended March 31, 2001 and April 1, 2000.

Interest Expense. Interest expense increased $0.6 million, or 17.0% to $4.4 million for the three month period ended March 31, 2001 from $3.7 million for the three month period ended April 1, 2000. Total indebtedness increased $2.1 million from $159.9 million at April 1, 2000 to $162.0 million at March 31, 2001. The increase was due to the Ivers-Lee acquisition in August 2000 of $8.0 million partially offset by positive cash flow from operations.

OUTSOURCING SERVICES GROUP, INC.

Liquidity and Capital Resources

As of March 31, 2001, OSG had cash and cash equivalents of $4.6 million, working capital of $40.7 million, long-term debt of $162.0 million and $12.1 million available under the senior secured credit facility. The Company's primary source of liquidity during the quarter ended March 31, 2001, was cash flows generated through its operations. Cash provided by (used in) operating activities was $5.3 million and ($3.2) million for the three month periods ended March 31, 2001 and April 1, 2000, respectively. Net cash used in investing activities was $3.9 million and $43.2 million for the three month periods ended March 31, 2001 and April 1, 2000, respectively. The decrease was due to the acquisition of Precision in February 2000 ($42.4 million). Net cash (used in) provided by financing activities was ($.6) million due to repurchase of stock for the three months ended March 31, 2001 and $47.1 million for the three months ended April 1, 2000. The decrease was due to the aforementioned acquisition of Precision.

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 of 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 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 and operating 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 2001 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.

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; 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.

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

Item Number	Exhibit	Page

11.	Statement of computation of basic and diluted net income per share	19


(b)		Reports on Form 8-K

		None.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	OUTSOURCING SERVICES GROUP, INC.
Dated: May 14, 2001	By:	/s/ JOSEPH HEALY Joseph Healy Chief Executive Officer, President and Director (Principal Executive Officer)
Dated: May 14, 2001	By:	/s/ PERRY MORGAN Perry Morgan Chief Financial Officer Vice President and Secretary (Principal Financial and Accounting Officer)

QuickLinks

OUTSOURCING SERVICES GROUP, INC. INDEX TO FORM 10-Q
OUTSOURCING SERVICES GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data)
OUTSOURCING SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND APRIL 1, 2000 (Dollars in thousands, except for per share data) (Unaudited)
OUTSOURCING SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND APRIL 1, 2000 (Dollars in thousands) (Unaudited)
OUTSOURCING SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND APRIL 1, 2000 (Continued) (Dollars in thousands) (Unaudited)
OUTSOURCING SERVICES GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND APRIL 1, 2000 (Unaudited)
Condensed Combined Balance Sheet At March 31, 2001 (Unaudited) (Dollars in thousands)
Condensed Combined Statement of Operation for the Three Months ended March 31, 2001 (Unaudited) (Dollars in thousands)
Condensed Combined Statement of Cash Flows For The Three Months Ended March 31, 2001 (Unaudited) (Dollars in thousands)
OUTSOURCING SERVICES GROUP, INC.
OUTSOURCING SERVICES GROUP, INC.
PART II Other Information
SIGNATURES

OUTSOURCING SERVICES GROUP INC 10-Q